C.P. (5) 226 - Railway Man-Power and Winter Coal Supplies: Memorandum by the Minister of Fuel and Power.

227 - Situation in the South African High Commission Territories: Memorandum by the Secretary of State for Commonwealth Relations.

228 - Leasehold Reform: Memorandum by the Lord Chancellor.

229 - The Death Penalty under the Naval Discipline Act: Memorandum by the First Lord of the Admiralty.

230 - The European Defence Effort and European Integration Schemes: Memorandum by the Secretary of State for Foreign Affairs.

231 - Future of the British Council: Memorandum by the Secretaries of State for Foreign Affairs, Colonies and Commonwealth Relations.

232 - Report of Broadcasting Committee: Memorandum by the Secretary of State for Commonwealth Relations and the Postmaster-General.

233 - German Contribution to Western Defence: Memorandum by Foreign Secretary and Minister of Defence.

234 - Japanese Peace Treaty: Japanese Shipbuilding Capacity: Memorandum by the Secretary of State for Foreign Affairs.

235 - German Debt Settlement: Memorandum by the Secretary of State for Foreign Affairs.

236 - Council of Europe: Memorandum by the Secretary of State for Foreign Affairs.

237 - The Man-Power Position on the British Railways: Memorandum by the Minister of Transport.

238 - German Defence Contribution: Economic and Financial Implications: Note by the Prime Minister.

239 - Washington and Ottawa Meetings: Review of British Policy: Memorandum by the Prime Minister.

240 - Germany: Memorandum by the Prime Minister.

241 - Persia: Sterling Control Order: Memorandum by the Chancellor of the Exchequer.

242 - The Balance of Payments Position: Memorandum by the Chancellor of the Exchequer.

243 - Supplies of Finished Military Equipment from the United States: Memorandum by the Minister of Defence.

244 - Legal Consequences of Egyptian Abrogation of the 1936 Treaty: Memorandum by the Secretary of State for Foreign Affairs.

245 - Long Term Financial Prospects of the British Transport Commission: Memorandum by Minister of Transport.

246 - The Coal Transport Situation: Memorandum by the Minister of Fuel and Power.

247 - The Manning of the Civil Defence Corps and Fire Service: Memorandum by the Home Secretary and the Secretary of State for Scotland.

248 - Man-Power Requirements of the Police at the Outset of any major war: Memorandum by the Home Secretary and the Secretary of State for Scotland. C.P. (51) 249 - The Man-Power Position on the British Railways: Memorandum by the Minister of Labour and National Service.

250 - Bamangwato Affairs: Tshokedi Khama: Memorandum by the Parliamentary Under-Secretary of State for Commonwealth Relations.

251 - Report on Discussions in Washington and Ottawa on Balance of Payments and Defence Questions: Memorandum by the Chancellor of the Exchequer.

252 - The King's Speech on the Prorogation of Parliament: Memorandum by the Home Secretary.

253 - Agricultural Wages and Prices: Memorandum by the Minister of Agriculture and Fisheries.

254 - Locomotive Contract for Persia: Memorandum by the President of the Board of Trade.

255 - Man-power for the Mines: Memorandum by the Minister of Fuel and Power.

256 - Press Articles and Interviews by Ministers: Note by the Prime Minister.

257 - The Oil Dispute with Persia: Memorandum by the Secretary of State for Foreign Affairs.

258 - Use of Official Transport Facilities during the General Election: Note by the Prime Minister.

259 - The King's Speech on the Prorogation of Parliament: Memorandum by the Prime Minister.

260 - Future of the South Bank Site: Memorandum by the Lord Privy Seal.

261 - General Election: Enquiries by Candidates: Note by the Prime Minister.

262 - Man-Power: Measures to deal with Labour Supply: Memorandum by the Minister of Labour and National Service.

263 - Treaty of Alliance with Libya: Memorandum by the Secretary of State for Foreign Affairs.

264 - Continuance of the Festival Pleasure Gardens: Memorandum by the Lord Privy Seal.

265 - Closer Association in Central Africa: Memorandum by the Secretary of State for the Colonies and the Secretary of State for Commonwealth Relations.

266 - Bilateral and Tripartite Talks in Washington and Atlantic Council Meeting in Ottawa: 10th-20th September, 1951: Memorandum by the Secretary of State for Foreign Affairs, the Chancellor of the Exchequer and the Minister of Defence.

267 - Custody of Cabinet Documents: Note by the Prime Minister. RAILWAY MAN-POWER AND WINTER COAL SUPPLIES

Memorandum by the Minister of Fuel and Power

From the point of view of our coal supplies next winter, I desire to give my strongest support to the proposals, submitted by the Minister of Transport in C.P. (51) 215, for strengthening railway man-power. I feel bound to do this not only by reason of the great anxiety which I myself feel on this subject but also in the light of the urgent representations which I have received from the Coal Industry National Consultative Council which embraces both the National Coal Board and the National Union of Mineworkers.

2. The experience of last winter showed clearly that the volume of coal traffic then handled represented the maximum which the railways were capable of coping with, while the expected increase in production next winter is much greater (2-4 million tons as compared with 1 million tons) than the imports which had to be handled last winter. Moreover, it is not even as though the railway situation to-day is as good as it was a year ago, for this summer the situation on the railways is such that the Railway Executive has had to put embargoes on the movement of coal trains, a step which in a summer period is unprecedented in living memory.

3. The present outlook is therefore one of exceptional gravity, for not only are we likely to have a deficit this summer of 1.25 million tons of large coal, but we are faced also with the risk that next winter our difficulties will be still further aggravated through the railways being unable to move even the whole of the coal which we hope to produce.

4. Such a development would be most serious from two points of view. First, if the railways cannot clear the coal from the pits, stoppage of production and unemployment of miners will be inevitable and total supplies will be even less than we expect. Second, if the railways are unable to move coal to the points where it is required, we shall be prevented from giving assistance in those areas which will be most short of supplies. This will fall with especial force upon house coal for the domestic consumer, which, in addition to being very seriously inadequate in quantity, will also be unevenly distributed over different parts of the country. In particular, the problem of supplying London with house coal will become very acute. Already, indeed, the stocks of house coal in the London area are the worst on record for this time of year (101,000 tons as compared with 176,000 tons in 1950, and 325,000 tons in 1948 and 1949).

5. I accordingly ask my colleagues to give full weight to the importance of doing everything possible to increase railway man-power, and thus to mitigate so far as possible the extremely serious house coal problem which will inevitably face us next winter.

P. J. N-B.

Ministry of Fuel and Power, S. W. 1.,

24TH JULY, 1951. SITUATION IN THE SOUTH AFRICAN HIGH COMMISSION TERRITORIES

MEMORANDUM BY THE SECRETARY OF STATE FOR COMMONWEALTH RELATIONS

The High Commissioner (Sir Evelyn Baring) has reported a conversation which he has had with an entirely trustworthy person who recently saw Dr. Malan in Pretoria on the latter's return from holiday during the Parliamentary Recess. The High Commissioner's informant said that Dr. Malan at once referred to the position of the High Commission Territories. Dr. Malan said that it looked as if the United Kingdom Government might give way in the Bechuanaland Protectorate (i.e., allow Seretse Khama to return) and that if this happened the consequences would be deplorable. He would have to take very early action. He would have recourse to economic measures. He thought that, if he "put on the screw hard" to force transfer, he would have a united South Africa behind him.

2. The High Commissioner asked his informant whether, in the latter's opinion, the Union Government would actually blockade the Territories if Seretse were recognised. The informant gave it as his opinion that they probably would. They might themselves suffer damage; but the Nationalist Government had already shown itself ready on occasion to cut off its nose to spite its face. An example of impatient action against its own interests was the ban hastily imposed on the admission of "foreign" (i.e., non-Union) natives to Union post-primary schools.

3. The High Commissioner then asked his informant whether he thought Union opinion on the recognition of Seretse was stronger or weaker than it had been early in 1950. The reply was that he thought it much stronger, partly on account of developments in the Gold Coast but still more because recognition of Seretse now would involve the reversal of a previous decision and would appear to be a surrender in face of a combination of political pressure in the United Kingdom and violence in the Protectorate, both engineered by Africans.

4. The High Commissioner's informant said in conclusion that the Union Government were bound to press very hard next year for transfer of the Territories. Resistance would be difficult for us anyhow; it would become hopeless if Seretse were recognised.

5. As I have said, Sir Evelyn Baring's informant is entirely trustworthy. I am satisfied that what he said reflects what is in Dr. Malan's mind. I think it important, therefore, that my colleagues should be aware of it; but we must, of course, be extremely careful not to compromise our source by making any disclosure of what we know from him.

6. It is worth adding that Mr. Paver, who is head of the South African Bantu Press, recently volunteered in conversation with a member of my staff views very much on the lines of those outlined above. Paver's assessments of South African opinion, European or African, are usually pretty accurate. He said that his impression was that recognition of Seretse now would probably be resented even more in the Union than a year ago. Against the background of the Gold Coast developments the Nationalist Government would get a lot of support even from English-speaking South Africans for any action it took vis-à-vis the Protectorates.

7. I have also heard that the United States Chargé d'Affaires in Pretoria is reporting to the same effect.

P. C. G. W. CONFIDENTIAL C.P.(51) 228 COPY NO. 31 25TH JULY, 1951 CABINET

LEASEHOLD REFORM

Memorandum by the Lord Chancellor

On the Prime Minister's directions, I arranged for a preliminary discussion, by the Ministers most closely concerned, of the Attorney-General's memorandum on Leasehold Reform (C.P.(51) 205).

Security of Tenure

2. The Attorney-General's memorandum refers to various proposals for giving a statutory security of tenure to residential tenants who are not at present covered by the Rent Acts. These proposals are as follows:

Houses of "Rent Act" Size

(a) An occupying ground lessee of a house, however small, is not now protected on expiry of his ground lease if (as is usually the case) the ground rent is less than two-thirds of the rateable value. This should be reversed so as to give ground lessees the same protection under the Rent Acts as rack-rent tenants.

(b) Sub-tenants who hold from ground lessees and are at present protected by the Rent Acts should continue to be so protected (as against the head landlord) after the expiry of the intermediate ground lease. (This would restore the law to what it was thought to be before a recent decision of the Court of Appeal.)

Bigger Houses

(c) There should be a prima facie right to a renewal of tenancy for all occupying tenants of unfurnished residential property too big to attract the Rent Acts code, whether they are ground lessees or hold on ordinary occupational tenancies of whatever length. The right would have to be subject to a fairly wide list of "just exceptions". The rent would be a fair market rent, fixed, in default of agreement, by a Tribunal, and the period and other terms of the lease would also be subject to the Tribunal. There are many details which would have to be further worked out.

3. These proposals, if implemented, would represent a very considerable social reform, and we felt they ought to be approved in principle.

Leasehold Enfranchisement

4. The question then arises whether we should confine ourselves to protecting and prolonging the tenant's right of occupation, or whether we should go further and give him also the right to acquire compulsorily the proprietorship of his house, which he can then use either for occupation or, if he prefers, for purposes of resale or of letting at a rack rent.

5. There was general agreement at our meeting (a) that, if there is to be a scheme of leasehold enfranchisement, it must be limited to occupying ground lessees of residential property and should not be extended to rack-rent tenants under ordinary occupational tenancies (normally for 3, 5, 7 or 14 years); (b) that the only practicable scheme for fixing the price which the tenant should pay on exercising his right to enfranchise his lease was one which assumed the enactment of the proposals, outlined above, which give the tenant security of tenure on the natural expiry of the lease. The market value of a reversion appreciates very steeply towards the end of the term, because of the prospect of reversion to vacant possession. If we gave the tenant the right to enfranchise on payment of the market value of the reversion, the right would be too costly to be of any use to him. But the effect of the above proposals would be to diminish very considerably the market value of the reversion, because the reversion would be subject to the presence of a sitting tenant at a controlled rent.

6. On the general merits of enfranchisement, some of us were inclined to think that, if security of tenure were granted, little case would be left on social grounds for adding a right of leasehold enfranchisement, with its inevitable complications. On the other hand, some of us felt that there would be grave disappointment on political grounds if our permanent legislation on leasehold reform did not include some right, however restricted, to leasehold enfranchisement.

7. On the whole, we felt that the Cabinet might find it expedient, without committing themselves now to the principle of leasehold enfranchisement, to direct that a scheme should be worked out on a provisional basis in order that Ministers might judge, in the light of difficulties thrown up in detailed consideration, whether such a measure would be worth while.

8. If leasehold enfranchisement is introduced, it may well be necessary to exclude from its scope leasehold property held by local and public authorities as ground landlord, whether it is held for development (as in the case of New Town Corporations and local planning authorities) or for investment (as in the case of the Crown Lands Commissioners and the Duchies of Cornwall and Lancaster).

9. There is also the question whether tenants who purchase a ground lease during the last, say, 10 or 15 years of its term should be excluded from the scheme, on the ground that their stake in the property is not really greater than that of an occupational tenant under a short lease and that security of tenure at the end of the lease is sufficient for them; and whether landlords who brought the superior interest towards the end of the term with a view to occupation or re-development on the expiry of the lease, and who paid a large sum for the reversion, ought likewise to be excluded. These suggestions lead to considerable difficulties, which are discussed at length in paragraphs 17-25 of the Annex to C.P.(51) 205 and summarised in paragraph 26 of the Annex.

Summary

10. The questions for decision are summarised in paragraph 48 of the Annex to C.P.(51) 205. Our general feeling was that questions 1 and 2 (all parts) should be answered in the affirmative. As to the questions relating to leasehold enfranchisement, we thought that, without prejudicing the general issue whether leasehold enfranchisement was or was not desirable, we might ask for a scheme to be further worked out on the assumption that there would be affirmative answers to questions 3, 4 and 5. Our discussion showed some differences of view about the details in question 5: probably, however, a preliminary draft Bill could be prepared on the basis of alternatives, which would assist Ministers in reaching a firm decision.

House of Lords, S.W.1,

25TH JULY, 1951. THE DEATH PENALTY UNDER THE NAVAL DISCIPLINE ACT

Memorandum by the First Lord of the Admiralty

At its meeting on 22nd January (C.M.(51) 5th Conclusions, Minute 1) the Cabinet considered a memorandum by the Minister of Defence on certain questions of policy arising out of the recommendations of the Lewis and Pilcher Committees on court-martial procedure and agreed that the preparation of a Naval Discipline Bill should proceed. When the Bill is introduced discussion of the death penalty provision in the Naval Disciplinary Code will be inevitable because for historical reasons the present Act differs markedly in this respect from the Army and Air Force Acts. I am, therefore, anxious to introduce amendments which will bring the Naval Code into line with the others, so far as inherent differences in circumstances allow, and which will generally ensure that the death penalty is prescribed only in those cases where it would be logically defensible under modern conditions.

General

The amendments proposed are shown in detail in the Appendix. Broadly they fall under four heads:

(i) the mandatory death sentence is everywhere abolished;

(ii) the death sentence is replaced as a maximum sentence by imprisonment exceeding two years in those cases where the lower maximum is already prescribed for a corresponding offence in the Army and Royal Air Force (these are deserting post and sleeping on watch in the presence of the enemy) - and also in the case of certain other offences, if committed through cowardice, where the analogous offences in the Army and Royal Air Force still carry the death penalty as the maximum, e.g. - surrendering ship to the enemy when capable of making a successful defence or improperly withdrawing from a fight or forsaking station, and failure to use utmost exertions to carry out orders of superior officers to prepare for action or during action;

(iii) the death sentence is abolished in certain cases where it is now clearly obsolete - arson in dockyards etc., failure in defence of convoy, and

(iv) the maximum sentence for mutiny is reduced in certain circumstances from death to imprisonment. I need only elaborate on (iv).

**Mutiny**

Experience shows that it is now possible to mitigate the severity of the sentences prescribed for mutinous offences except during war and in conditions equivalent to a state of war without any prejudice to naval discipline. I propose therefore:

(a) That death be retained as the maximum punishment at all times for mutiny accompanied by violence (Section 10). This would, however, be amended to prescribe the death sentence for mutiny accompanied by threat of violence or threatened use of arms. It would also be necessary to retain the death sentence at all times as the maximum punishment for incitement to mutiny with violence, threat of violence or threatened use of arms.

(b) That otherwise the maximum sentence of death for mutinous offences be retained only for offences committed in time of war and, in time of peace, for those committed in circumstances analogous to active service under the Army code and when under orders for such service.

2. "Active service" as a term does not exist in the present Naval Discipline Act; but the amendment would retain the death penalty for mutiny in the following circumstances:

(a) Service during operations, or in an area in which operations are taking place, against the enemy. The word "enemy" is already defined in the Act to include armed rebels, armed mutineers and pirates but would need to be extended to include armed rioters and forces such as the North Koreans and Chinese with whom we are now engaged in hostilities without being in a formal state of war.

(b) Service by persons who are landed in foreign countries in defence of life and property.

I am advised that this would result in a reasonably close approximation to "active service" under the Army and Air Force Acts. I do not propose, however, to take powers similar to those in the Army and Royal Air Force codes, whereby either the Admiralty or naval authorities could, in certain circumstances, by declaration, place a force under active service conditions for purposes of discipline, solely to make a mutinous offence incur the death penalty as the maximum punishment.

3. The Minister of Defence and the Secretaries of State for War and Air have expressed their concurrence in these proposals so far as mutiny is concerned, and have no objection to the Admiralty proceeding with the other proposals mentioned in paragraph 1. I understand that, if the proposals are put into effect, the Army and Air Councils would wish to amend the Army and Air Force Acts to provide that the death sentence for mutinous offences would be incurred under conditions broadly similar to those described in the amendments and that they would also wish to consider, for inclusion in the next year's Annual Bill, whether some further amendment of the death sentence provisions in Sections 4 and 6 of those Acts would be necessary in the interests of uniformity. I therefore seek the approval of the Cabinet to include in the Naval Discipline Bill the amendments shown in the third column of the Appendix.

Admiralty, S.W.1, 26TH JULY, 1951. APPENDIX

(Only those offences for which the death sentence is prescribed are shown against each section. Amendments shown in the third column are those which affect the punishments only.)

| N.D.A. Section | Offence | Proposed Amendment to Punishments | |----------------|-------------------------------------------------------------------------|-----------------------------------------------------------------------| | 2 | Misconduct in Action by a Flag Officer, Captain, Commander or Officer Commanding. | Reduce mandatory death sentence to maximum death sentence. | | | If he has acted traitorously | Reduce maximum from death to imprisonment. | | | If he has acted from cowardice | | | 3 | Failure by an officer to pursue enemy or assist friend, or improperly forsaking his station. | Reduce mandatory death sentence to maximum death sentence. | | | If he has acted traitorously | Reduce maximum from death to imprisonment. | | | If he has acted from cowardice | | | 4 | Delaying or discouraging action or service | No change (but subject to further consideration in the Admiralty with a view to reduction of the maximum death penalty). | | | Deserting post in presence or Sleeping on Watch vicinity of the enemy. | Reduce maximum from death to imprisonment. | | 5 | Failure by a person other than a Commanding Officer to use his utmost exertions to carry the orders of his superior officers into execution when ordered to prepare for action or during action. | Reduce mandatory death sentence to maximum death sentence. | | | If he has acted traitorously | Reduce maximum from death to imprisonment. | | | If he has acted from cowardice | | | N.D.A. Section | Offence | Proposed Amendment to Punishments | |---------------|-------------------------------------------------------------------------|-----------------------------------------------------------------------| | 6 | Spying for the enemy (by persons subject to the Act and others) | No change. | | 7 | Holding traitorous correspondence with or giving intelligence to the enemy by persons subject to the Act | No change. | | | Failure to disclose information received from the enemy subject to the Act | No change. | | | Relief of enemy with supplies | No change. | | 10 | Joining in mutiny with violence | No change to maximum: death sentence, but same punishment to be incurred for: | | | Failure to use utmost exertions to suppress mutiny with violence, if acting traitorously | (1) mutiny accompanied by threatened use of violence or of arms; | | | | (2) incitation to mutiny actual or intended, with violence or threatened use of violence or of arms. | | 11 | Ringleader of mutiny not accompanied by violence, threat of violence (etc.) | Reduce maximum death sentence to imprisonment except: in time of war and on active service. | | 12 | Seduction from duty or allegiance or incitation to commit any act of mutiny, by a person subject to the Act | -do- (except as provided for incitation to mutiny with violence etc. at (2) under S.10 above). | | 13 | Seduction from duty or allegiance by a person on board H.M. ship but not otherwise subject to the Act | -do- | | 19 | Desertion to the enemy | No change. | | 30 | Failure to take care of and defend ships under convoy | Sections to be repealed. | | 34 | Arson in Dockyards, shore establishments and ships | Reduce maximum death sentence to imprisonment. | THE EUROPEAN DEFENCE EFFORT AND EUROPEAN INTEGRATION SCHEMES

Memorandum by the Secretary of State for Foreign Affairs

The purpose of this paper is to consider what we could do by way of precept and exhortation to stimulate the defence efforts of Western European Governments, and to examine the connected question of European attitudes towards schemes of continental integration.

2. Western European Governments are hampered in their defence efforts by the state of mind of their people, large numbers of whom are either opposed to rearmament altogether or are afraid of its economic and political effects. Over a quarter of the population of France and Italy still vote Communist either for social and economic reasons or because of Soviet peace propaganda. Among the non-Communists there is a widespread feeling that rearmament is at best useless and at worst dangerous; useless because it may not be enough to stop the Russians, dangerous because it may provoke the Russians to attack while in the meantime undermining prosperity and so increasing the forces of native Communism. There is also a certain restiveness as to what is conceived of as American pressure, combined with anxiety about the purposes of American policy, though the Americans are still relied on for aid. The Governments thus lack the necessary popular support to put any drive into their rearmament efforts. Their unwillingness to impose the necessary sacrifices on the better-to-do sections of the population (on whom politically they tend more and more to depend), combined in many cases with archaic fiscal systems, acts as an impediment to increased production, and they use the argument that to impose additional burdens on the population to finance rearmament would be playing into the hands of the Communists.

3. There is also a fairly widespread feeling on the Continent that the nation is no longer a viable political unit and that the survival of Western Europe depends on the creation of some type of larger unity. The frustration of this urge for unity to some extent contributes towards the lack of enthusiasm for rearmament, though the strength of the urge and the reasons for it vary from country to country. It seems to be strongest in France and Western Germany, fairly strong in Italy, Holland and Austria, and least strong in the Scandinavian and Iberian countries. In all cases support for European integration is based on a blend of idealism and political motives, economic motives seeming to play little part. The main motive of the Germans is no doubt to regain national equality, for they can count on their national strength to assure for their country the position of primus inter pares in any integrated European system. The French aim is to unify Western Europe both against the Russian danger and against the excessive influence of the United States, and to bind Germany securely. to the West. There also appears to be a certain variation of attitude towards the different possible forms which integration might take. The most advanced form, that of a United States of Europe, is advocated only by extremists. There is a good deal of support for the 'Strasbourg thesis', i.e. the surrender by Governments of policy on selected subjects to a central supra-national authority, but this seems everywhere to have lost ground in favour of what may be described as the 'Schuman Plan Concept', i.e. a pooling of sovereignty not primarily or directly over policy but over "commodities". This concept finds little support in the Scandinavian and Iberian countries, and it is precisely in these countries that most support is to be found for the North Atlantic Treaty principle. The French for their part are beginning to appreciate the value of the Atlantic connection but they regard the North Atlantic Treaty Organisation not as integration but merely as a modernised form of the old-fashioned system of alliances and they would like to go further than this. There is no doubt an element of escapism in all schemes of integration and some of their supporters are no doubt animated by 'neutralist' sentiment.

4. It follows from the analysis in paragraph 2 above that we should:

(i) take what opportunities we can to help persuade the Europeans generally:

(a) that the North Atlantic Treaty powers are capable of producing a system of defence sufficiently strong to stop the Red Army on the frontiers of Western Europe;

(b) that the process of rearmament is not likely to provoke Russian aggression but that on the contrary weakness will invite it;

(c) that the sacrifices involved in present rearmament programmes have been much exaggerated in some quarters especially if increased production can be achieved;

(ii) in addressing ourselves to European statesmen at international gatherings, dwell particularly on the themes of social justice and fiscal reform.

It also follows from the analysis in paragraph 3 of European attitudes towards schemes of integration that it would:

(iii) at least help to rally European interest in rearmament if, even when we ourselves intend to remain outside schemes of integration, we would counter the impression, prevalent on the Continent, that we are hostile to such schemes.

05. There is little in the way of precept and exhortation which we can do to put across theme (i)(a). So long as N.A.T.O. ground and air forces are manifestly inferior to the Red Army the Europeans will continue to suffer from a feeling of insecurity. Theme (i)(b) has for long formed part of our propaganda on the nature of Soviet imperialism and there are no obvious new measures for us to take to drive the lesson home. There will, however, be a number of opportunities during the next few months for expounding our views on themes (i)(c), (ii) and (iii).

06. The Chancellor of the Exchequer took the opportunity of his visit to Paris on 13th July to fire some opening shots. The theme of his conversations with the other European statesmen was the apathy prevalent in Europe and the threat created by rearmament to the standard of living as a result of the consequential rise in prices. He pressed his view that the rise in prices (cost inflation) was the main issue and he expressed the hope that when the Consultative Assembly of the Council met in October the debate might be steered to bring out the need for fiscal reforms and social justice. There is general agreement that the Organisation for European Economic Co-operation should communicate a further and more stimulating report to the Assembly of the Council of Europe for their debate in October and I understand that the Chancellor will be willing to present this report to the Assembly himself, if others are agreeable. This will give him the opportunity of further enlarging on the themes in question.

07. The Committee of Ministers of the Council of Europe meets in Strasbourg on 2nd August. I will then have an opportunity to take up the same themes myself as well as to define the attitude of His Majesty's Government towards projects of Continental integration. While it will be essential for me to reaffirm the attachment of the United Kingdom above all else to the Atlantic connection I would also like to take the opportunity of making a gesture of friendship towards the "Schuman Plan Concept" (not to the Schuman Plan itself). There would be no need for me to suggest the possibility of British participation in any schemes of integration but I could go some way towards removing the belief that we are automatically opposed to all ideas of European integration even without our participation. I would have to choose my remarks in order not to appear to be blessing any project for integration which might be put forward and I would not propose to mention any particular project by name.

08. Finally the Council of the North Atlantic Treaty will meet probably in Ottawa in mid-September. This will be the main occasion on which to put pressure on the European Governments to increase and speed up their defence efforts. The Financial and Economic Board of the North Atlantic Treaty Organisation will almost certainly be submitting a report to the Council, the primary purpose of which will be to examine the economic implications of rearmament and the relative burdens on the economies of the different countries of the defence efforts to which they are pledged and to offer some suggestions as to the methods by which these direct burdens of defence might be equitably shared. The United Kingdom representative on the Board is being instructed to try to ensure that the report brings out the lesson that the burdens already accepted by the European countries are not so grievous as some of their Governments have been inclined to pretend and that the remedy for many of their difficulties lies in their own hands. At the same time we will also bring out the burdens imposed on many countries by the sharp deterioration in the terms of trade. Ministers attending the Council meeting will be able to rub these facts in.

09. I invite my colleagues to endorse the general line of action suggested in paragraphs 6-8 above.

10. Since this paper was drafted I have had a report from the United Kingdom Delegation to the Organisation for European Economic Co-operation that M. Stikker and M. Marjolin have made certain proposals which may involve some modification of the details, though not of the general line and purpose of the programme of action which I have outlined.

H.M.

Foreign Office, S.W.1,

27TH JULY, 1951. CONFIDENTIAL

C.P. (51) 231 26th July, 1951

CABINET

FUTURE OF THE BRITISH COUNCIL

MEMORANDUM BY THE SECRETARIES OF STATE FOR FOREIGN AFFAIRS, COLONIES AND COMMONWEALTH RELATIONS

At their meeting on 21st February, 1946, (C.M. (46) 17th Conclusions, Minute 4 (2)) the Cabinet agreed that the British Council should be continued for a period of five years. This period came to an end on 31st March last.

2. The main conclusions which can be drawn from experience of the Council's activities during the past five years are as follows:

(i) that the Council, in its work of familiarising foreign, colonial and Commonwealth peoples with the ideals, methods and achievements of this country, lends an important aid to the maintenance of British political and trading influence in the widest sense, and plays an increasingly important part in developing satisfactory relations between this country and the peoples of the colonies and of the new self-governing territories of the Commonwealth; that it is valuable as presenting a positive alternative to communism; and that these services are such that, if the Council did not exist, some other agency supported by public funds would be needed in its place;

(ii) that there are solid advantages in this work being done by a non-official body and not by a governmental organisation.

Recommendations

3. We have therefore four recommendations to make:

(1) That the British Council's existence should be prolonged indefinitely, but that some form of review should take place at the end of ten years in order to ascertain whether any modifications of the existing organisation and administration are necessary.

(2) That the non-official status of the Council should be preserved.

(3) That since, in order to plan work of a long-term nature, to lease premises and to secure a fair proportion of staff on a long-term basis, some form of stabilisation of its authorised expenditure is essential, the Overseas Departments should be instructed to work out, in consultation with the Treasury, a reasonable minimum figure below which, subject to exceptional circumstances, the income of the Council should not over a number of years be permitted to fall.

(4) That in the course of the examination referred to in (3) attention should be given to the possibility of making further reductions in the size of the Council's headquarters.

Circumstances of the Cabinet decision of 1946 and the principal questions now to be decided

04. The British Council is a grant-aided body incorporated by a Royal Charter which sets no limit to the period of its existence, but no special financial provision has ever been made for its work to continue indefinitely. On 22nd June, 1944, the War Cabinet Committee on the Machinery of Government recommended that a full enquiry should be carried out under the auspices of the Foreign Secretary and the Chancellor of the Exchequer. This enquiry was undertaken by Sir Findlater Stewart, who reported on 8th February, 1945, in favour of its continuance as an independent organisation, but with certain changes in the form of its governing body. The Foreign Office did not agree with a number of his recommendations. The whole matter was included in the purview of an Official Committee on Government Information Services, whose report was presented to the Cabinet by the Lord President of the Council on 12th February, 1946 (C.P. (46) 54). The Cabinet, at their meeting mentioned in paragraph 1, gave authority for the Council to continue for a further five years "on the understanding that there should be a closer scrutiny of its projected activities, that it should no longer have authority to do its own production and procurement work, and that its scope should be restricted to educational and cultural work and should not overlap with the Government's Information Services."

05. There has been no difficulty in putting into effect the second and third provisions of this decision, and as regards the first a close scrutiny of the Council's activities has been maintained by the Overseas Departments at home and their representatives abroad, and the Select Committee on Estimates (1947-48 Session, Third Report) has investigated them in great detail. Particulars of the financial side of the method of control are given in paragraph 3 of the Appendix to this paper. Generally speaking, this scrutiny has achieved its end. The matter, therefore, which we now put before our colleagues is that of the future of the Council's existence, and this appears to depend on the answers to two questions: (1) whether the work done by the British Council is an indispensable adjunct to the policy of His Majesty's Government towards foreign, colonial and Commonwealth countries, and if so (2) whether that work is better done by a non-official body than by a Government Department.

06. The Cabinet in 1946 gave a qualified affirmative answer to both these questions. Experience of the British Council's operations on the scale to which they had grown was mainly that of war-time, and it was necessary to observe their effect in the post-war situation. An assessment of the Council's work in its three overseas spheres since 1946, and some idea of what would be involved if that work were to be transferred to another agency or agencies, may be had by reference to the Appendix, which outlines the framework of the Council as it now is, its relation to Government Departments, the types of establishment it maintains in the field, and the subjects they handle.

07. It seems clear that the work done by the British Council is an indispensable adjunct to the foreign, colonial and commonwealth policy of His Majesty's Government; and that, if the Council did not exist, His Majesty's Government would have to find some other agency or agencies through which to present to other peoples a full and balanced picture of the life and thought of this country as a means of disposing them well towards us, and as a positive alternative to communism, to discharge their obligations to international organisations and under international treaties, and to operate important educational schemes such as that for the welfare of overseas students.

08. As regards the second question, in 1946 the Cabinet decided that the balance of advantage lay on the side of preserving the Council's non-official status under certain provisos. Those provisos, as will be seen from paragraph 5 above, have been acted upon, and the experience of the past five years of the work in the three overseas spheres and in the United Kingdom set out in the Appendix has confirmed the wisdom of this decision. In this connexion it is of interest to note that the Report of the Select Committee on Estimates (Session 1947-48 Third Report) put as its first recommendation that the work should be carried on under the existing system, and not incorporated in a Government Department (paragraphs 7 and 47 (i) of the Committee's Report).

09. In the light of the foregoing it is concluded that the continued existence of the British Council is in the national interest. The work is essentially long-term in its nature, and suffers from any uncertainty as to continuity. Doubt as to its life makes it extremely difficult for the Council to recruit or retain the most suitable staff. In the circumstances it would appear reasonable to prolong the Council's existence indefinitely, but that some form of review should take place at, say, the end of ten years, in order to ascertain whether any modifications of the existing organisation and administration are necessary. Stability of Income and Effect of Cuts

10. It has been pointed out that the Council's work is of long term, and that uncertainty as to the Council's future adversely affects both work and staff. But even if it is accepted that the Council's existence should be indefinitely prolonged, the Council is handicapped if it does not know from one year to another to within several hundred thousand pounds how much money it will have available. This affects all fields of work, but has particular reference to the Foreign Office grant-in-aid. This grant-in-aid was cut by £343,000 in 1948, £19,000 in 1949, £325,000 in 1950 and £364,000 in the current year. The total estimated expenditure for the current year is £2,650,000, of which the Foreign Office grant-in-aid is £1,862,000. In terms of activities, these successive cuts have, over and above economies that could be effected without undue sacrifice, caused inroads into valuable work which include the following: withdrawal from three Latin American countries and more than halving the work in the remainder; withdrawal from Iceland, the Sudan and (except for one school) Ethiopia; the closure of two centres in Persia, two in Egypt, two in Turkey, three in Italy, one in Greece, one in Austria, one in Portugal, five in France and the Benelux countries; postponement of projected development in India and Pakistan; a reduction of 28 per cent. in the number of scholarships and 49 per cent. in the value of bursaries, a reduction of 25 per cent. in the current year alone in the supply of books, and abandonment of commissioning new Council films.

11. These reductions were not finally determined until the Estimates were due to be submitted to the Treasury. This is disturbing in its effect on the staff and wasteful in its effects on the work. The recruitment and retention of a fair proportion of permanent or at least semi-permanent staff of the right quality is essential. Many of the Council's operations, both in the artistic and the educational spheres, require long-term commitments and a good deal of planning ahead. The work involves leases and contracts, most of which must be based on the academic year, which cuts across the financial year, and these make up a substantial part of the overseas expenditure. Educational facilities at universities and colleges can rarely be arranged at short notice. Sudden cuts on such commitments yield only a portion of their value in the immediate year, with the result that the Council is forced to cut what in a full year represents more, and to select economies for their immediate yield rather than their relative importance. The Council was extravagant in the years preceding the Cabinet review of 1946, but under the present full-time Chairman, who was appointed in that year, and the advice of Government Departments things have been put right, and this should be all the more reason to avoid now what militates against sound planning.

12. In the Commonwealth and the Colonies the effect of this financial uncertainty is also detrimental. During the period under review it had been agreed by the Overseas Departments that an expansion in these fields during the next few years was necessary, in consequence of the grant of autonomy to India, Pakistan and Ceylon and the diminution of political control from the United Kingdom in Colonial territories referred to in the last sentence of paragraph 15 of the Appendix. But sudden limitations imposed upon the Council's expenditure have militated against the application of any orderly long-term programme of expansion.

13. The non-official members of the Council's Executive Committee, on learning of the nature of the cut likely to be imposed this year, circulated a memorandum on 5th January, 1951, to the nine Ministers nominating the official members of the Committee. They later sent a deputation to interview the Prime Minister on 6th February and put forward three requests: (1) to be able to plan the work on a stable basis over a period of years; (2) to be able to establish the staff on a permanent footing with a defined and permanent field of activity; and (3) to be consulted at an early stage when the Council's affairs are under discussion by Government Departments.

14. Clearly it is not possible for His Majesty's Government to bind themselves as to what the British Council may be allowed to spend in future years. Nevertheless, in the interests of enabling the Council to carry out its essentially long-term work with suitable staff, we consider that some form of stabilisation of its authorised income is essential. We therefore suggest that the Overseas Departments be instructed to work out, in consultation with the Treasury, a reasonable minimum below which, subject to exceptional circumstances, the income of the Council should not over a number of years be permitted to fall.

15. Our colleagues may feel that in the course of this examination attention should be given to the size of the Council's headquarters' staff in this country. This is a point to which public criticism has been directed in the past; and, although substantial reductions have been made since the Select Committee on Estimates drew attention to the matter in 1948, it is conceivable that there may be room for some further small economy.

H. M. J. G. P. C. G. W.

APPENDIX

THE BRITISH COUNCIL'S ORGANISATION, RELATION TO GOVERNMENT DEPARTMENTS AND METHOD OF WORK

1. The governing body is an Executive Committee of 30 members, containing Members of Parliament, distinguished persons from the principal fields of education, art, science, the Trades Union Congress, &c., and 9 nominees of Government Departments, including, of course, the three Overseas Departments. Its Chairman is also the Director-General of the Council's regular executive organisation, and is thus a whole-time salaried official. He is appointed by the Executive Committee after consultation with the Foreign Secretary. A number of Advisory Committees, consisting of persons distinguished in certain branches of learning, art, science, medicine, &c., serving in a voluntary capacity, advise the Council on their particular subjects. The regular staff in the London office, partly headquarters proper and partly departments supplying material for use in the field or performing executive functions of educational work, are in constant touch at various levels with the Overseas and other Government Departments.

2. The Council is represented in 34 foreign countries, 16 colonies and 5 self-governing States of the Commonwealth.

3. As regards financial control, the Council administers a grant-in-aid for the Foreign Office. All activities financed from the grant-in-aid which are new, or are extended to a new territory, or which involve a question of financial principle, all projects costing £5,000 or over, and all posts involving a salary of £1,000 or more require individual Treasury sanction, which must be applied for through the Foreign Office. The Council works for the Commonwealth Relations Office and the Colonial Office, for technical reasons, on an agency basis. It follows from this that financial control is close. The recent Report of the Organisation and Methods Division of the Treasury (November 1950), which was confined mainly to the Council's headquarters in London, confirmed that the Council was "operating economically with clear practical objectives and with a good standard of financial control." Representatives of the Overseas Departments sit on the committee which prepares the annual budget. The Council's Representatives abroad are under instructions to keep close touch with His Majesty's Missions, and the latter receive copies of their annual budget proposals and forward them to London with their comments. His Majesty's Missions in foreign countries will shortly receive instructions to include in their quarterly reports on Information matters a section on the work and administration of the British Council and to give particular attention to their supervision of its activities. A scheme has recently been accepted by the Council whereby the Foreign Office Inspectors, when inspecting His Majesty's Missions abroad, also inspect the Council's establishments. The Inspectors' reports on the Council's establishments are sent both to the Foreign Office and to the Council.

4. The Council's work in the artistic and literary spheres is by no means the principal part of its activities. Expenditure on fine arts, music, drama, books, periodicals and films in 1950-51 amounted to slightly under 10 per cent. of the total expenditure. Of these, moreover, books and periodicals are supplied to libraries as a necessary accompaniment to promoting a wider knowledge of the United Kingdom and the English language, and the films are documentary, mostly suitable. for use as complements to lectures, and include special medical and scientific films. The rest is spent on education, science, the teaching of English, the care of overseas visitors and students, and publicising ourselves and our various contributions to democratic civilisation. Education includes teaching the English language, subsidies to British schools abroad, subsidisation of posts of university and school-teaching staff held by British subjects in institutions of other countries, and bringing over to this country, on scholarships and bursaries, students (mostly post-graduate), technicians, trade unionists, manual workers, nurses, &c., for the study and practice of our methods. English teaching includes summer schools for foreign teachers of English and, when invited, advising foreign educational authorities on the subject. An important element throughout is the liaison work of putting individuals and bodies overseas in touch with their counterparts in this country; this has particular reference to work in countries whose state of development approximates most closely to our own.

5. The organisation maintained to handle this work overseas consists, first and foremost, of the Council's Institute or Centre. This as a rule contains a library, reading room, hall for lectures, debates, film shows, concerts, exhibitions, and rooms for study groups and classes. In certain places the Council is an agency for the holding of British examinations such as the London Matriculation and the Cambridge English examinations. English teaching is concentrated mainly on teaching the teachers, and is generally confined to countries where the standard attained in the local education system is unsatisfactory. In a number of places, instead of a Council Institute or Centre, the organisation takes the form of an anglophile club, supported by local subscription and possibly a Council subsidy, to which the Council supplies the secretary and other key positions. These anglophile societies (e.g., in Latin America) are often largely occupied with the teaching of English.

6. In the United Kingdom the Council maintains establishments in several, mainly university, towns for the benefit of overseas students and visitors. There is in most cases a Council Centre in which activities similar to those in the Institutes and Centres abroad are conducted, except that English classes and examinations are not held, the library is a less important feature, and instead there are a canteen and student welfare activities with recreational facilities. In certain towns there is, in addition, a students' hostel and welfare centre.

Work in Foreign Countries

7. Since the Cabinet decision of 1946, the changes in the world political situation have given a new emphasis to the Council's purpose and activities. The task defined in the Council's Charter as "promoting a wider knowledge of the United Kingdom" is now in fact bound up with the wider task of defending Western civilisation against the inroads of communism by presenting a positive alternative. The Communist countries have paid their tribute to this by preventing the Council's establishment in the U.S.S.R. and Roumania, and expelling it from Czechoslovakia, Hungary, and Bulgaria. The development of the "cold war" and of defensive groups such as Western Union on the one hand, and the growth of United Nations Specialised Agencies and cultural conventions on the other, have added considerably to the Council's responsibilities. The Brussels Treaty and the Council of Europe both involve cultural work which His Majesty's Government looks in part to the Council to discharge; and the Council is generally His Majesty's Government's principal nominated agency for the implementation of cultural conventions signed since the war.

8. The Council's work is also of benefit to British trade. It is significant that the Shell Company are (anonymously) financing the Council's representation in Venezuela rather than see it withdrawn (as it would have been on grounds of economy). Concrete examples of trade benefits are a half million pound order which resulted from the Council's work on anaesthesia in Italy and many orders for technical equipment which followed the Council's work in Turkey, Chile, and elsewhere.

9. Experience of the work in foreign countries has shown that the Council's non-official status bestows three signal advantages. It removes the taint of political propaganda; it permits access to groups and institutions (e.g., universities, professional associations, trade unions) which would be much less accessible to an official body; and it enables the Council to stand aloof from the political estrangements which from time to time beset the course of official international relations. The Council have been able to develop techniques which an ordinary Government Department cannot possess. An example of what this may mean is the Council's work in Yugoslavia. In the years immediately following the war, when Yugoslav official co-operation was almost entirely lacking, the Council was able to preserve many contacts which would have been denied to British officials and thus to continue its work and turn things to account when official relations improved. The following is an extract from a report in the Christian Science Monitor of 27th April last by their Special Correspondent in Belgrade on Yugoslavia's rapid development of cultural ties with the West and the abolition of Russian as a compulsory second language. "... Within a month, enthusiastic but overworked officials of the British Council, a cultural organisation working in foreign countries with the support of the British Government, were able to report that 80 per cent. of the students were choosing English. Since then, interest in the English language and, through the language, in English history, literature, natural science and the arts, as well as present British political experience has 'swept the country.' In twelve months the British here, through their Embassy and the British Council, have chalked up a record of non-political cultural achievement in Yugoslavia without a parallel in any Communist country since the Russian Revolution."

Work in the Commonwealth

10. In the Commonwealth the Council has Representatives and offices in Australia, New Zealand, India, Pakistan and Ceylon, and although, for political and financial reasons, there are no Representatives as yet in South Africa and Canada, certain services such as lecturers, exhibitions, &c., are provided direct from London.

11. The work of the Council in the Commonwealth is still in its infancy. The oldest post, Australia, was set up only five years ago, and the latest, Ceylon, in 1950. This extension of Council activity has been the direct result of invitations of the Commonwealth countries concerned.

12. The Council has a very definite rôle in strengthening Commonwealth links. Even in a country like New Zealand, where the British tradition is strong, it cannot be assumed that this will always remain so. Both New Zealand and Australia feel isolated from the United Kingdom and there is a danger, already apparent in Australia, that the traditional ties may weaken.

13. In the Asian countries of the Commonwealth it is vital to retain and develop, through all possible means, the British connection. On the success of this largely depend the links of those countries with the West. The positive exposition of Western thought through literature, the arts and science can do much to resist the influence of Communism and help to consolidate the goodwill of those countries towards the United Kingdom which at present is very marked, but which may not persist automatically. It must also be remembered that in India English will, in some years' time, cease to be an official language and this may lead to the lowering of the standard of English teaching in the Universities and Colleges, and general decline of interest in English culture. The Council can do much to counteract this tendency.

14. It has been suggested that this cultural work could be handled by the official Information Services and by cultural attaches. No doubt certain routine services could be dealt with in this way, but these are the least important side of the Council's work. The particular value of the Council rests on its close links with academic, artistic and professional circles with which it can collaborate much more freely and with greater effect than would be possible if it were a purely official body.

Work in the Colonies

15. The same can be said of work in the Colonies. Sir Findlater Stewart, in his report, compared the work of the Council in the Colonies with its activities in foreign countries in the following terms: "The work of the Council in the Colonies stands on a different footing from the work in foreign countries. In the latter the Council has not, and cannot have, the responsibility for the educational or cultural advancement of the people except for the limited purpose of showing them the British way of life. The cultural advancement of colonial peoples and the promotion of their cultural relations with this country are parts of a single task. and responsibility for it rests with the Secretary of State for the Colonies and would so rest if there were no British Council." The position has changed very greatly since these words were written, and a rather different assessment of the situation is required to-day. Over the whole colonial field there have been notable advances towards local self-government in domestic affairs, and this process is becoming intensified. If the colonial peoples are to remain in contented association with the United Kingdom as they become politically mature, it is essential to keep before them, and particularly before the influential sections of the colonial communities, the value of the British connexion, to foster co-operation between the various racial elements in the communities, and to strengthen the ties of culture and tradition on which we must increasingly rely as political control from the United Kingdom is withdrawn.

16. The British Council has proved to be the most efficient and the most acceptable instrument for promoting such mutual understanding, and its work becomes more necessary as the executive governments in the Colonies become more representative of the local population and less an agency for carrying out centrally-controlled policy. The very circumstances which make this work more necessary render it impracticable for it to be done by any existing department of Government, and the more desirable that it should be done by the existing non-official agency rather than by any new agency to be created for the purpose. A recent enquiry addressed to the Governors of all colonial territories where the Council is operating, or is about to start operations, produced a unanimous testimony to the need for the Council's work and, in the case of many territories, pressing requests for the extension of its activities. Over a wide range of this work, the Council must clearly employ the same techniques in relation to the Colonies as in relation to foreign countries and Commonwealth States, and it should therefore have reasonable freedom to plan and execute its operations as a whole, subject to directives from the Government Department concerned.

Work in the United Kingdom

17. The work of the Council in the United Kingdom is an essential complement to its work overseas.

18. The arrangements made through the Council for the reception and guidance of students, visitors and bursars are an invaluable means of creating positive goodwill towards Britain and of counteracting the efforts of subversive propagandists. The special suitability of the Council for looking after colonial and other overseas students, and bringing a healthy influence to bear upon them, was a governing factor in the decision to transfer to the Council from the Colonial Office the administration and executive duties of looking after colonial students and providing accommodation and welfare services for them. This was recognised by the Official Committee set up to consider the Welfare of Overseas Students, whose conclusions were accepted by Ministers (Gen. 231/3rd Meeting, Minute 4, 19th December, 1949). The benefit of this work is to a large extent shared by Commonwealth and foreign students and other visitors. A particular object of putting this work on to an effective footing, free from the accusation of "patronage" and from the disadvantages of the segregation of students by race, nationality, &c., by entrusting it to the British Council was the necessity to combat Communist propaganda, to which it has been found that overseas students without contacts in this country, especially colonials, are in nearly all cases subjected. By reception and welfare arrangements, and help in finding suitable accommodation, this danger has in one year's working been considerably offset.

19. The Council is His Majesty's Government's agency for arranging the programmes of Fellows sent to this country by the United Nations Specialised Agencies, and visitors studying conditions and techniques here under arrangements connected with President Truman's Fourth Point and the Colombo Plan. CABINET

REPORT OF BROADCASTING COMMITTEE

Memorandum by the Secretary of State for Commonwealth Relations and the Postmaster-General

At their meeting on 19th July (C.M. (51) 53rd Conclusions, Minute 2) our colleagues invited us to make it plain in the debate on the Broadcasting Committee's Report that, before reaching final decisions on the recommendations of that Committee, the Government would be prepared to take into account the views expressed in debate.

2. On the main essentials we recommend that there should be no change from the proposals set out in the White Paper (Cmd. 8291):-

(a) The British Broadcasting Corporation should be continued as the authority responsible for all broadcasting in the United Kingdom on substantially the present basis, i.e. the monopoly should continue.

(b) The prohibition of any commercial advertisement or sponsored programme without the written consent of the Postmaster-General should be repeated.

(c) The charter should be renewed for a term of fifteen years.

There was some criticism of each of these proposals, but little that was new, and we are not inclined to attach any undue weight to it.

3. The debate in the main concentrated on the two issues of:-

(a) The percentage of the net licence revenue that the B.B.C. should receive for the next three years.

(b) The constitution of Broadcasting Councils in Scotland, Wales and Northern Ireland.

4. Our colleagues will recall that we originally asked them to agree that the whole of the net licence revenue should be paid to the B.B.C. for three years. The Cabinet decided, however (C.M. (51) 49th Conclusions, Minute 4, Conclusion (3)), that the B.B.C. should receive 85%. We doubt whether any slight concession, e.g. an increase to 90%, would materially reduce criticism and it would tend to weaken the Government's case. The arguments for 85% are strong and we recommend that no concession should be made.

5. On the second point, criticism of our proposals for the constitution of Broadcasting Councils in Scotland, Wales and Northern Ireland was fairly widespread and was based primarily on the possible introduction of politics into broadcasting and on the unsuitability of local authorities for the sort of task involved.

6. Some concession may be felt to be necessary. One course would be to accept the recommendation of the Broadcasting Committee in toto. We feel, however, as we explained in C.P.(51) 183, that there are grave objections to their proposals for a Commission of five persons to be appointed and paid by the Government. In effect this would mean the setting up of separate corporations, with the attendant accentuation of all the difficulties of divided loyalties and overlapping authority which will be present in some degree in any scheme of extraneous control. We fear also that owing to inevitable and embarrassing pressures nationalist elements would tend to be over-represented on these small Commissions and would themselves be exposed to continuous nationalist pressure.

7. Our proposals for the constitution of Broadcasting Councils were accordingly designed to ensure that the Councils should be large, that their composition should be automatic, and representative of all the people in the national region, and be completely independent of the B.B.C. and/or the Government of the day. So composed, they would have been able to exercise a general influence on their Home Programmes without the danger of interference inherent in a small body exercising detailed continuous control, and would have been relatively free from nationalist pressure. Our colleagues will recall, however, that when we suggested that the members of the Councils should be drawn from local authorities we did not propose that Councils should have the direct and autonomous powers that are now to be theirs. The executive powers accorded to the Councils in the White Paper give colour to the criticisms advanced in the Debate that politics would, under our plan, enter into regional broadcasting. We do not suggest that it is practicable at this stage to go back on the White Paper statement of the powers to be given to Councils.

8. The ideal solution should, we think, conform to the requirements that the Councils should be large (e.g. 25 members) and constituted automatically. We can see no way of attaining this other than appointment from the major local authorities. If it is felt to be impossible to adhere to that plan there is little choice other than:

(a) appointment by Government at its complete discretion of, say, 25 members;

(b) appointment by Government at its discretion of, say, 25 persons drawn largely from representative bodies (e.g. local authorities, churches, universities) without any binding commitment as to the bodies to be represented;

(c) appointment by Government of persons nominated by representative bodies.

Course (a) may be felt to be too great a departure from the White Paper proposal. Course (c) has attractions but it would be difficult to draw up a scheme satisfactory to all bodies which might claim rights to be represented. Course (b) gives considerable elasticity while importing the idea that the Council will be representative of wider interests and appears to be the most acceptable alternative.

9. The powers of the Broadcasting Councils outlined in the Debate did not come in for any serious criticism. They go some way to avoid too great fragmentation of the Corporation and we propose that they should be retained. They are that the Broadcasting Councils:

(i) should control the policy and content of their Home Programmes; (ii) should be subject to the duties and obligations of the B.B.C. set out in the Charter and Licence;

(iii) should be bound by the agreed arrangements for party political broadcasts.

(iv) should be advisory in matters of finance and capital development;

(v) should be responsible for the appointment of the staff wholly employed on their Home Programmes, but the contracts of service of the staff should be with the B.B.C. (The Regional Controllers would continue to be appointed by the B.B.C.).

10. The proposals in the White Paper regarding the Advisory Councils for the English Regions were not attacked and we suggest no alteration. We consider it desirable, however, that the first periodical review of the B.B.C. should consider how effectively the Corporation has carried out the recommendation of the Broadcasting Committee that these Councils should be made more representative.

11. We do not think that there is any need to issue a further White Paper giving the Government's decision on these matters. It may be convenient to arrange for a Question to be asked when the House resumes so as to enable the Government's decision to be made public and thus test the reaction of Members prior to the publication of the draft Charter and the Licence.

12. We ask our colleagues:

(i) to agree that no concession should be made on the proposal to pay the B.B.C. 85% of the net licence revenue for three years.

(ii) to decide (a) whether the proposals for constituting Broadcasting Councils set out in the White Paper are to be adhered to or (b) if not, whether the Councils should be constituted by the appointment by the Government at its discretion of, say, 25 persons drawn largely from representative bodies without any binding commitment as to the bodies to be represented.

(iii) to agree that the Broadcasting Councils should have the powers set out in paragraph 9 above.

P.C.G.W. N.E.

27TH JULY, 1951 CABINET

GERMAN CONTRIBUTION TO WESTERN DEFENCE

MEMORANDUM BY FOREIGN SECRETARY AND MINISTER OF DEFENCE

Background

In September 1950 the Cabinet accepted in principle a German contribution to Western defence (C.M. (50) 59th Conclusions, Minute 1). This decision, which was reached with some reluctance, was a necessary pre-condition for obtaining United States agreement to the establishment of an integrated North Atlantic Treaty Headquarters in Europe, the nomination of an American Supreme Commander and the despatch of further American forces to Europe in peacetime. It was based on the view, shared by the United States and British Chiefs of Staff, that even with additional American troops, the allied forces likely to be available would still be inadequate for the defence of Europe; and that if Europe was to be saved from enemy occupation it must be defended in Germany and with German military assistance.

2. The French Government were not at first prepared to agree to German rearmament on any terms, but eventually produced the "Pleven Plan" for a European Army in which Germany would participate. A compromise programme of action was agreed upon by the North Atlantic Council at Brussels in December 1950, when it was decided that—

(a) negotiations should be opened between the three occupying Powers, on behalf of the North Atlantic Treaty Organisation, and the Germans for the raising, on certain conditions, of German units for incorporation in General Eisenhower's integrated force;

(b) the three occupying Powers should also discuss with the Germans "any changes in the present occupation arrangements which might logically attend a German defence contribution"; and

(c) the French Government should invite other North Atlantic Treaty European Governments to a conference in Paris to discuss the "Pleven Plan."

3. The Brussels decisions thus set on foot three parallel sets of negotiations, all of which have a direct bearing on a German contribution to Western defence. The first set (on the raising of German units for incorporation in General Eisenhower's integrated force) has been taking place over the last six months at Bonn and has now been concluded. A report by the three High Commissioners has been agreed with the Germans and submitted to the three occupying Governments. This report outlines German ideas on the form their contribution might take, and points out where these conflict with the conditions laid down at Brussels. The second set of negotiations (on changes in the present occupation arrangements) is still proceeding in Germany and is not likely to reach a conclusion for some months yet. But it is hoped by the end of July or the middle of August to submit a report for the consideration of Governments. The third set (on the "Pleven Plan" for a European Army) has been proceeding in Paris between France, Western Germany, Italy, Belgium and Luxembourg (with other North Atlantic Treaty Organisation Powers, including the United Kingdom, United States and Canada as observers) and has also not yet reached a conclusion. An interim report to Governments is, however, expected to emerge shortly.

4. The United States Government have now proposed in an aide mémoire to the Foreign Office and the Quai d'Orsay that the three occupying Powers should consult together on the Bonn report and, if possible, agree upon a common line before submitting it to the North Atlantic Council. They have suggested that this consultation should take place in the early days of August in Washington through national representatives on the Standing Group and that it should also include an examination of the preliminary report on the European Army. We have replied agreeing generally with the United States proposals, but suggesting that political representatives should be associated with the discussions.

5. The object of this paper is to obtain ministerial approval for the guidance to be given to our representatives in the Washington discussions with regard to both the general policy of His Majesty's Government on a German contribution to Western defence and the detailed proposals contained in the Bonn report.

The Choice before His Majesty's Government

06. Of the three concurrent studies relating to German rearmament only the Bonn discussion, as shown above, has been completed. The conference in Paris is only just approaching the stage at which any clear idea can be obtained of what the European Army would look like, and on present form the discussions on the Occupation Statute have still several months to run. In these circumstances, it is not yet possible to foresee precisely the form in which any German contribution would be raised, and there are certainly other elements in the problem on which we cannot yet express firm views. One of these is the financial implications for the United Kingdom of the creation of a German armed force on any substantial scale. The German Government is already questioning its ability to meet Allied occupation costs from its own budget. It is only a matter of time before some part of the cost of maintaining Allied forces in Germany has to be borne by the Occupying Forces themselves. The creation of a German armed force which will inevitably throw a heavy burden on the German budget, especially in the initial stages, is bound to accelerate this process.

07. His Majesty's Government, while accepting the principle of a German contribution, have always reserved their right to consider the timing and the nature of this contribution. This reservation is still valid, but it does not absolve us from the need to take decisions when circumstances demand it. The stakes in the game far transcend the mere recruitment of a few German divisions. In the first place, the whole future of Western Germany is involved, and on our handling of this matter may turn the question whether she can be retained in the Western camp or not. Any attempt permanently to "sterilize" Western Germany by keeping her disarmed and neutral would inevitably result in her being lost to the West. There are already unpleasant signs in Germany that the position of inequality and the absence of any positive national purpose cannot be maintained indefinitely without grave risk. Secondly, the defence of Europe demands a strategy based on the Elbe and not on the Rhine, and the Western Powers clearly cannot defend Western Germany without German co-operation and the assistance of German man-power. This leads to the inescapable conclusion, already accepted by the Cabinet, that some form of German rearmament is necessary for Western defence.

08. Other important factors are, first, the impatience of the Americans over the slowness of Western European rearmament as a whole and their belief that German participation has become an immediate necessity; second, the breakdown of the Four-Power Talks in Paris, which while they lasted had inhibited a forward policy in this matter; thirdly, the expectations aroused in the Germans by the conclusion of the Bonn discussions and by the public statements of Mr. McCloy. Unless we are to come into open conflict with the Americans and to risk seriously rebuffing Dr. Adenauer and the German Federal Government, we are compelled to move forward.

09. In these circumstances our choice is limited to the question in what form the German contribution should be raised. On this there appear to be three main considerations. First, the military necessity of obtaining an effective contribution at the earliest possible moment; second, the need to consider whether a decision to rearm the Germans might not provoke a change of policy on the part of the Soviet Union and thus bring about a conflict which it is the whole object of our rearmament effort to avoid; and thirdly, the need to ensure that any German rearmament shall take place in conditions which are least calculated to make Germany dangerous to the security of Western Europe, either in her own right as under Hitler or in association with Soviet Russia.

10. Of these three considerations the first is primarily but not wholly military. The military authorities of the United States and the United Kingdom are unanimous in thinking that without the early raising of German man-power to reinforce the Allied forces on the continent there is no hope of holding a Soviet attack. The problem of equipping German forces is no longer believed to be so serious as was originally expected. The United States consider that they will be in a position to provide all the arms required for training purposes in the very near future. While the Chiefs of Staff agree that it would be necessary to phase the training and build-up of German units with the arrival of equipment, they do not consider that this in any way detracts from the need to start recruiting and training German land forces. The political aspects of this are that seven months have passed since the decision in principle was taken by the Atlantic Powers, and nothing has happened. This delay already behind us argues powerfully against further delay.

11. As regards the second point, it has always been the view of His Majesty's Government, and must surely remain so, that we must not be deterred by the fear of Soviet reactions from building up a position of strength in Western Europe. This policy has proved justified at each step which we have taken, from the first conclusion of the Brussels Treaty to the appointment of General Eisenhower as Supreme Commander and the reinforcement of United States troops in Europe. The proposed German contribution is part and parcel of the Western defence effort as a whole; and in order to minimise Russian apprehensions, we must make this abundantly clear. In other words we must ensure that the German effort does not take the form of a national army; that it is clearly tied in with the Western effort as a whole, and seen to be inextricable therefrom. So long as these conditions are fulfilled, we do not believe that the raising of a German contribution, which has now been under active public discussion for nearly a year, would cause any sudden change in Soviet policy.

12. The third consideration leads to the same conclusion. The interests of Western security too demand that German rearmament take place on conditions which tie Germany as closely as possible to the West and offer her a position and a rôle to play in the Western community which will satisfy her energies and ambition.

13. These conditions are realisable now. Widespread German dislike of rearmament has recently given way to increased anxiety regarding European defence. The present German Government is prepared, and even anxious, to raise forces under conditions which would preclude their use for nationalist or revanchiste purposes and would not involve a revival of the old militarist class. Their main condition is that Germany should acquire a broad equality of status with other Powers and that the German forces should have complete equality with those of other participating countries. At the same moment, the French Government, in the European Army Conference, are actively advocating the same concept and are ready to place their own forces in a similar position. This combination of circumstances is not likely to last indefinitely, and if the present occasion is lost we may never again be able to direct German rearmament (which in the long run must inevitably take place in some form) into such controlled channels. Moreover, failure to respond to the new frame of mind in Germany would undoubtedly create disillusion and encourage a return to neutralism.

14. Nor must we overlook the importance of American opinion. The American aide-mémoire referred to in paragraph 4 above contains the sentence:

"The United States Government perceives that an undue delay on this important practical matter (German rearmament) would cause serious doubts as to the seriousness of the purpose of the N.A.T.O. nations to proceed in the most expeditious manner for the creation of an adequate defence of Western Europe."

This point of view is undoubtedly shared to some extent by General Eisenhower who is known to be concerned over the insufficient progress of European defence in general.

15. Strong arguments of British and European self-interest therefore support the view that German rearmament in the form and on the conditions which can be applied to-day is infinitely preferable to what will become inevitable if we try to halt progress. The impetus towards a European or Atlantic solution will be lost and the harsher alternatives of a German nationalist or an eastern-orientated German army may well confront us.

Washington Discussions

16. For these reasons we consider that our objective at the Washington discussions should be to reach agreement on positive recommendations for the early realisation of a German contribution to European defence.

17. In order to reach such agreement it will be necessary to take account of and to reconcile three main elements in the situation: —

(i) the insistence of the French that the European Army solution should be considered in advance of, and given preference to, any direct contribution of German forces to the N.A.T.O. Supreme Command;

(ii) the determination of the Germans not to accept conditions which would place them in an inferior position to the other N.A.T.O. Powers; and

(iii) the overriding need, from the point of view of Atlantic defence as a whole, to ensure that any scheme for a German defence contribution is militarily effective and immediately practicable.

We examined these three elements separately as follows: —

(i) French Insistence on European Army

18. Hitherto all N.A.T.O. negotiations on a German defence contribution have been bedevilled by the conflict between French resistance to any form of German rearmament and American insistence on the immediate need for a German contribution. This conflict has put a serious strain on the relations of the three major N.A.T.O. Powers, which it is important to avoid for the future. It would be a mistake to underestimate French fears of the danger of German military revival on one hand and of action liable to provoke Russia on the other: their plan for a European Army is designed to reduce both these dangers and we consider that the only hope of securing their agreement to a German defence contribution lies in agreeing in principle that it should be made in the context of a European Army. This means that in any arrangement resulting from these discussions the United States, United Kingdom and Germany will have to give the French an undertaking that any German contribution will eventually take the form of a contribution to the European Army. We do not, of course, suggest that the United Kingdom should itself join the European Army.

19. Acceptance of the French thesis on this major point would also have the following advantages: —

(a) it would present German rearmament to the world at large, and to the Soviet Union in particular, in the most favourable and least provocative light possible, i.e., as part of the movement towards European unity and not as a purely military measure;

(b) it would be a further step towards integrating Germany in the West and might prove a useful half-way house to eventual German membership of N.A.T.O.;

(c) it would make the French more willing to agree to a solution of the German political problem which will enable Germany to associate herself with Western defence. (It should be noted here that such a solution is important to us not only in relation to defence but as part of our general political objective, mentioned in (b) above, of bringing Germany into willing and equal partnership with the Western nations.)

(ii) German Desire for Equality

20. The last word about German rearmament must, in the nature of things, be said by the Germans themselves: and in the opinion of the United Kingdom High Commissioner no German Government will ever agree to say this last word, nor if they did, would they be able to pass the required legislation through the German Parliament, until Germany is accorded a status of equality, or approximate equality, with the Allies not only in the military, but also in the political field. The main obstacle to a German contribution is, thus, at least as much political as military in character. On the purely military side the proposed European Army solution should, in itself, go far towards satisfying the German demand for equality. It is an essential point in the French plan that all national contingents should receive equal treatment within the European Army, and that all countries should be on an equal footing in its political and administrative control. The European Defence Commissioner, who would be solely responsible, under the military guidance and command of SACEUR, for the formation and administration of the European Army, would in turn be responsible to a Common Assembly and Council of Ministers, on which all parties would be represented.

21. In one important respect, however, the French plan, in its present form, places Germany in a position of military inequality in relation to the other N.A.T.O. countries. It provides that national units contributed to the European Army (and consequently all German units) shall not be larger than Combat Groups, whereas other national contributions to General Eisenhower's forces would continue to be Divisions. The only militarily feasible way of eliminating this inequality is to raise the size of the maximum national unit contributed to the European Army (and consequently of the German unit) to that of a Division. We therefore recommend that, in return for our agreement in principle to support the idea of a European Army, the French should be pressed to accept the Division rather than the Combat Group as the unit for the European Army. This arrangement would also be more acceptable on purely military grounds, since the Chiefs of Staff have always held that the Division is the optimum unit.

(iii) Requirements of Atlantic Defence

22. Until we receive the promised interim report on the progress of the European Army conference, it is impossible to say for sure how far the French plan, in other respects than the size of units, will be militarily effective as a contribution to the immediate needs of Atlantic defence. It is quite clear that we must obtain the fullest information about the concept of the European Army as soon as possible. Countries which have actively participated in the European Army Conference have been France, Belgium, Italy, Luxembourg and Western Germany. Canada, Denmark, Holland, Norway, Portugal, the United Kingdom and the United States have been represented as observers. According to the advance information that we have been able to obtain, the following proposals are likely to be included in the interim report.

(i) The European Army would be formed in successive stages. The aim of the first stage would be to produce a force of some 30 divisions—backed by reserve and supply units and supported by the necessary air forces. This stage would, it is suggested, take 18 months from the time when agreement to form a European Army had been reached.

(ii) Political authority for the European Army would be exercised by a "Defence Commissioner" responsible to a Council of Ministers representing the countries participating in the European Army.

(iii) The European Army would form part of General Eisenhower's Command under an integrated headquarters responsible to him.

23. It is clear that one of the principle military objections to the French plan is that in its present form it may delay a German defence contribution. We cannot accept such delay without detriment to Atlantic defence as a whole. It is, therefore, necessary to seek to modify the French proposals in such a way that they do not postpone the first practical steps towards raising German units until the organisation of the European Army has been completed. We must, in fact, persuade the French to agree that the two processes should be simultaneous. This would mean that while the Member Nations were working out the practical details of a European Army, the Germans would be allowed to start recruiting and training military units of divisional strength for incorporation in that Army. We should also insist that if those units were ready trained and equipped before the organisation of the European Army was complete they would be temporarily assigned to General Eisenhower's integrated force pending the formation of the European Army. Although General Eisenhower's views on this question are not officially known, we believe they are roughly in line with our own.

The Bonn Report, Size, Nature and Organisation of German Contingents

24. Once it is agreed that the Germans should be allowed to begin raising forces before the European Army plan is complete, it will be necessary to settle the size, nature and organisation of these forces. The only positive proposals yet put forward are those of the Germans themselves, as set out in the Bonn Report; those must, therefore, form the basis of the detailed military discussions in Washington.

25. On the political side, the only two major points of difference between the Bonn proposals and those agreed by the North Atlantic Council at Brussels are that the Germans—

(a) refuse to accept certain controls (including Allied control over the Defence Administration) unless they are applied equally to the forces of other powers taking part in the defence of Europe; and

(b) insist that the administration of defence requires a Defence Ministry instead of the Administrative Office proposed in the Brussels decisions.

26. As regards the first point it is clearly a vital Allied interest to safeguard against a revival of German militarism and a German General Staff, and, therefore, to retain some controls over the German military machine. The exact nature of these controls cannot be determined until we have a clearer idea than we have at present of how the European Army is going to work and of the outcome of the negotiations concerning contractual arrangements. Generally speaking, it seems likely that the incorporation of German units in the European Army, the administrative control of which will be vested equally in all participating Powers, will in itself provide controls adequate for Allied needs and acceptable to German opinion. As regards a German Ministry of Defence, our view is that for practical reasons the Germans will need a special Department for the administration of their armed forces; but the Foreign Office feel that the creation at the present time of a German Ministry of Defence, with a German Minister of Defence at its head, would be offensive to Allied opinion and unnecessarily provocative to the Russians. They have, therefore, suggested that, at any rate for the time being, the German Department responsible for the German armed forces should not be under a separate Minister but under one with other responsibilities (e.g., the Chancellor) and should have some less conspicuous title than Ministry of Defence. The Chiefs of Staff, on the other hand, consider that the only practicable solution of the problem is to create a German Ministry of Defence and that indeed the Germans for their part will be content with nothing less.

Procedure

27. If, as we think necessary, the next meeting of the Atlantic Council is to take the question of a German defence contribution within sight of practical realisation it will be necessary to submit to it firm and practicable recommendations on the form of such a contribution. These recommendations must be acceptable to General Eisenhower, under whose command the German units will come. We therefore propose that as soon as agreement is reached in Washington on the main points of principle, General Eisenhower or his representatives should be associated with the discussions. It might also be advisable, before any recommendations are finally submitted to the N.A. Powers as a whole, to bring in the Germans. Recommendation

28. It is recommended that the instructions to our representatives in Washington should be on the following lines:

(1) We consider that a German contribution to Western defence is militarily and politically necessary, that the negotiations to that end should proceed as rapidly as possible and that the Washington discussions should result in tripartite agreement for its early practical realisation.

(2) The most likely obstacle to agreement will be French reluctance to accept a German contribution except in the framework of a European Army. In order to carry the French with us, it is therefore necessary to be able to assure them that any German forces raised will form part, eventually, of the European Army.

(3) In order to make this concept at once militarily effective and acceptable to the Germans, we should insist on certain modifications in the present French proposals; in particular we should press the French to agree that the national unit in the European Army should be the Division and not the Combat Group, and that, pending the completion of the detailed organisation of the European Army, the Germans should be allowed to begin raising and training units for eventual incorporation in it; meanwhile, they should be temporarily assigned to General Eisenhower's command.

(4) To work out the details of a military solution on these lines for submission to the Atlantic Council, we should propose a subsequent meeting between the military representatives of the three Occupying Powers with General Eisenhower and perhaps also with representatives of the German Federal Republic.

(5) Meanwhile, we should press ahead with the current negotiations with Germany on the replacement of the existing Occupation Statute by contractual arrangements, since a German defence contribution is dependent on their satisfactory outcome.

H. M. E. S.

Whitehall, S.W. 1, 24th July, 1951. CABINET

JAPANESE PEACE TREATY:

JAPANESE SHIPBUILDING CAPACITY

Memorandum by the Secretary of State for Foreign Affairs

On 7th June (C.M.(51) 41st Conclusions, Minute 1(5)) the Cabinet agreed to defer a decision about the manner in which Japanese shipbuilding would be controlled until information was received about the further investigation of this subject in Tokyo.

2. It will be remembered that Mr. John Allison, Mr. John Foster Dulles' Assistant on the Japanese Peace Treaty, went to Tokyo immediately after Mr. Dulles' visit to London in June in order to discuss with the Japanese voluntary arrangements for a reduction of Japanese shipbuilding capacity.

3. On 3rd July, Mr. Allison sent to the United Kingdom Political Representative in Japan a memorandum prepared by the Japanese which contends that present shipbuilding capacity in Japan is not excessive.

4. The memorandum states that the present capacity of Japanese shipyards is not 310,100 gross tons a year but 676,700 tons (the difference between these two figures representing disused yards which are no longer serviceable). The actual operation rate is said to be 70 to 80 per cent. Output is therefore said to be 400,000 to 500,000 tons a year. The memorandum argues that, according to present plans, Japan will possess 1,569,000 tons of ocean-going ships by the end of 1952. Because of the longer hauls involved in Japan being obliged to trade with the United States and other areas instead of with China and the Far East, Japan will need 2,236,000 tons of ocean-going ships in 1953. Another 700,000 tons will thus have to be acquired by 1953, largely from new construction. The estimate of Japan's shipping requirements in 1956 is based upon an estimated overseas trade in that year of 32 million tons (compared with 20 million tons in 1951). On this basis, the memorandum claims, Japan would need 2,956,000 tons of ocean-going ships and 820,000 tons of coastal ships in 1956. This estimate is based upon the assumption that Japan carries 50 per cent of her foreign trade. It follows from these estimates, the memorandum concludes, that the present capacity of Japanese shipyards will be fully occupied at least until 1956, in supplying the essential requirements of Japan.

5. It is difficult to estimate the real requirements of Japan for shipping in the next five years. It is even difficult to say whether 676,000 tons a year is in fact the present capacity of Japanese shipyards. It is probable that the estimate of 32 million tons for Japan's foreign trade in 1956 is inflated. Nor do we accept the assumption that Japan should carry 50 per cent of her foreign trade. In addition the Japanese memorandum takes no account of ships bought by Japan from other countries (the purchase of 250,000 tons has already been authorised by the Supreme Commander). It is probable therefore that during the next five years Japanese capacity will in fact be excessive. Even if the Japanese estimates for the next five years are accepted as reasonable, it is probable that Japanese shipbuilding capacity would in any case be excessive in the period after 1956 because replacement demands would not keep a capacity of 676,000 tons fully occupied. There is therefore danger that after 1956 the Japanese fleet would continue to expand or else Japanese competition for shipbuilding orders would be intensified. Having regard to all the evidence, it seems probable that there is no economic ground for agreeing that Japan's capacity need exceed say a figure of about 400,000 tons per annum.

6. Nevertheless, the Cabinet have decided that no restrictions should be placed upon Japan for security reasons. The only grounds on which we can continue to urge the Americans to bring about some reduction in Japanese shipbuilding capacity is by showing that the present capacity is uneconomic in Japan's own interest. It is clear, however, that the Americans do not at present agree with our interpretation on this point, and as they do not agree we cannot expect that they will consent to the insertion in the present liberal and non-restrictive draft treaty of a restriction upon the Japanese economy designed mainly to reduce her competitive position compared with the United Kingdom. Moreover, while the Australian and New Zealand Governments share our anxieties on this score (see paragraph 3 below), India, Pakistan and Ceylon take the opposite view: they are strongly opposed both to the general idea of a restrictive Treaty and to any reduction of Japan's shipbuilding capacity in particular. To make an issue of this point would thus be to produce an open division between the Asiatic and non-Asiatic members of the Commonwealth, with the Asiatic members aligned on the side of the United States in favour of those liberal principles by which we too claim to have been guided in our general policy over the Treaty.

7. While therefore it is impracticable to suggest, at this stage, that the draft Treaty should include a provision restricting Japan's shipbuilding capacity, I suggest that we should inform the United States Government that we still consider this capacity to be excessive and that we must therefore continue to press for it to be reduced by action outside the Treaty.

8. The Australian and New Zealand Governments are very much concerned on security grounds to obtain some reduction in Japanese shipbuilding capacity. We should therefore give the Australian and New Zealand Governments an opportunity of making a simultaneous approach with us to the United States Government on the lines proposed above.

RECOMMENDATION

9. That we should inform the Australian and New Zealand Governments of the substance of the memorandum communicated by Mr. Allison and state that we propose to inform the United States Government of the reasons for which we still consider Japan's shipbuilding capacity to be excessive, so that we must continue to press for it to be reduced by action outside the Treaty; we should also enquire if the Australian and New Zealand Governments would be prepared to make simultaneous approaches with us to the United States Government on these lines.

Foreign Office, S.W.1, 30TH JULY, 1951.

H.M. CABINET

GERMAN DEBT SETTLEMENT

MEMORANDUM BY THE SECRETARY OF STATE FOR FOREIGN AFFAIRS

In my memorandum of 24th May (C.P. (51) 139) on the German Debt Settlement, I circulated to the Cabinet copies of documents which, in agreement with the Governments of France and the United States, were being sent to a number of other Governments and to private creditor groups with an interest in the settlement of German external debts. These documents, which were distributed on 24th May, were intended to form the basis for consultations during the Summer by the Tripartite Commission on German Debts, which had been set up to represent the three Governments, with the German Federal Government and with creditor interests in France, the United Kingdom and the United States. The consultations, which were to deal with Germany's pre-war debts, were planned to facilitate the exchange of views and the exploration of the various issues in preparation for a full conference in the Autumn with representatives of all countries with a significant interest as pre-war creditors of Germany. My colleagues may wish to know what steps in this procedure have so far been taken.

2. In accordance with the arrangements outlined in the documents, and after some preliminary exchanges of views in Bonn at the beginning of June with a delegation of the German Federal Government, the Tripartite Commission on German Debts has held a series of meetings in London.

3. In the first place, from 25th June to 3rd July, the Tripartite Commission held preliminary meetings with representatives of creditors from the United Kingdom, France and the United States in the presence of observers appointed by the Governments of the four other countries with a major creditor interest, namely, Belgium, the Netherlands, Sweden and Switzerland. These meetings with creditors only served to clarify the issues which required discussion and to enable the different creditor groups to make contact with each other and to reach a considerable measure of mutual understanding.

4. Then, between 5th July and 17th July, a preliminary conference on German Pre-war Debts took place, at which the Tripartite Commission received a delegation of the German Federal Government and representatives of the German debtors, as well as representatives of the creditors and the observers already referred to. The conference adopted, with little modification, an Agenda drawn up by the Tripartite Commission and organised itself in a series of Committees to study the points on this Agenda on which papers had been prepared by the Tripartite Commission. A copy of this Agenda is attached as an Annex. In these Committees representatives of the Tripartite Commission, of the German Delegation and of the creditors were able to get a clearer understanding of the scale of the various kinds of German pre-war external debts, to narrow down somewhat the issues on which decisions will be needed at a later stage, and to produce agreed papers describing these issues and in some cases setting out the preliminary views of the creditors and of the German Delegation on the solutions to be found.

5. This conference was intended to be of an exploratory character only, and it can be regarded as having fulfilled its purpose. It has brought into the open the points on which the main difficulties will arise in negotiating a settlement plan, and by doing so has facilitated the task of the Tripartite Commission in preparing for the full conference in the Autumn at which many other countries will be represented. The Tripartite Commission is now engaged in considering the results of these preliminary meetings and in preparing for the Autumn conference, the date of which will probably be in early November. Its aim in doing so is to ensure so far as possible that the settlement plan which will be worked out in the course of the Autumn conference will be consistent with the general principles already laid down by the three Governments. The main elements in these principles are that the plan should contribute to the normalisation of economic relations between Germany and other countries, that it should provide fair and equitable treatment of the various interests affected, and that it should not dislocate the German economy or add appreciably to the financial burden on any Occupying Power.

6. In addition, I should like my colleagues to be aware of two other questions which, though not on the Agenda of the recent conference, nevertheless, I understand, occupied an important position in the thoughts of some of the delegates, and in the case of the first of the two questions necessitated a good deal of discussion.

(a) Treatment of German External Assets

In accordance with the Paris Agreement on Reparation from Germany of December 1945 and other intergovernmental agreements flowing from it, former German assets in Allied countries and in a number of neutral countries have been or are being liquidated and the proceeds dealt with in accordance with decisions of the Allied Governments concerned. The German Delegation to the recent conference made it plain that the German Federal Government wished to bring the question of the treatment of these assets, and also possibly of assets removed from Germany under the dismantling programme, into the discussions on the debt settlement. Its aim appeared to be to link the two subjects in such a way as to reduce by some method, the nature of which was never made clear, the amount of the outstanding debts which had to be dealt with. The Tripartite Commission, while admitting that the loss of German external assets might affect in some degree Germany's future capacity to make payment on its external debts, firmly refused to discuss the principle of the treatment of these assets, which, it emphasised, had already been settled by the relevant intergovernmental Agreements and was outside their terms of reference. The matter was not taken further at the conference, but it is probable that the German Federal Government will raise it again at a later stage.

(b) The settlement of Germany's debts to the Allied Governments for economic assistance furnished since the war

The amounts claimed by the three Governments have been communicated to the German Delegation, but as the London Conference was concerned only with pre-war debts there has not so far been any discussion with the German Delegation about the arrangements to be made for settling the post-war debts. The German Delegation pointed out that the nature of these arrangements must clearly affect any German proposals which might be made in regard to pre-war debts and urged that there should be discussions on the post-war debts before the Autumn Conference. It is the intention of the Tripartite Commission that there should be such discussions, but before they can be held the three Governments will have to agree on the settlement arrangements for the post-war debts which they would be prepared to accept. The problem involved is now being studied with a view to its being submitted to my colleagues in due course.

H. M.

7th August, 1951. ANNEX

AGENDA ADOPTED AT PRELIMINARY CONSULTATIONS ON PRE-WAR GERMAN DEBTS

1. Examination of data on German pre-war external debts.

2. Technical questions: — (a) The problem of debts not strictly classifiable as external. (b) Debts of corporate bodies to be considered as constituting liabilities of the Reich. (c) German responsibility in respect of Austrian debts. (d) The problem of the Konversionskasse. (e) The problem of the Verrechnungskasse. (f) The Prussian debt. (g) The Gold Clause problem. (h) The external debts of Berlin. (i) The position of the Dawes and Young Loans.

3. Points of principle: — (a) The question of German ability to pay. (b) The contractual arrangements to put an end to Germany's default. (c) The problem of adjustment for changes in the economic situation of Germany. (d) The question of settlement of foreign currency claims in Deutschemark. (e) Problems arising from any discrepancy between the ability of debtors to pay Deutschemark and German ability to transfer. CABINET

COUNCIL OF EUROPE

MEMORANDUM BY THE SECRETARY OF STATE FOR FOREIGN AFFAIRS

I circulate herewith for the information of my colleagues the text of a statement which I made in a restricted session of the Committee of Ministers of the Council of Europe in Strasbourg on 3rd August, in an endeavour to promote a more robust and energetic attitude on the part of certain of the Continental Governments.

The statement was generally well received. M. Schuman thanked me for my analysis of the successes achieved by the West in the last year and for the tone of confidence of my remarks, which he said he shared. Dr. Adenauer, the German Federal Chancellor, said that this statement dispelled any idea that Great Britain might be adopting an attitude of reserve towards Europe.

My remarks were followed by a statement by M. Stikker on lines previously agreed upon between him, M. Schuman, M. Lange and myself, propounding the need for a new initiative by the European Powers designed to secure increased production for defence. As a result of this statement it was agreed that the Organisation for European Economic Co-operation (O.E.E.C.) should be invited to prepare a draft Declaration which could be issued at a further ministerial meeting towards the end of August. A draft already prepared by M. Marjolin, Secretary-General of the O.E.E.C., will form the basis for this text.

My announcement to the Joint Committee that the Chancellor of the Exchequer would be willing to introduce the O.E.E.C.'s Annual Report to the Consultative Assembly in October next was very favourably received. There is no doubt that this is regarded as a step forward by His Majesty's Government in their relations with the Council of Europe and as a mark of our desire to make full use of the Consultative functions of the Assembly.

We were concerned in the Joint Committee with a proposal by the Bureau of the Assembly that among the subjects to be placed on the agenda for the forthcoming meeting of representatives of the Assembly with representatives of the United States Congress should appear an item headed "Defence" with a number of controversial sub-headings on strictly defence matters, including German rearmament and the European Army. The Committee of Ministers were unanimous in considering that it would be improper, having regard to the Statute, for the subject to appear on the agenda in this form, and the Assembly representatives eventually agreed that the items relating to defence and the economic state of Europe should be merged in a new item headed: "The Economic and Political State of the Western World," from which the sub-heads on defence questions to which the Ministers had objected would be dropped. The new item includes as a sub-head the economic, social and moral impact of the rearmament programme.

The Ministers agreed that the O.E.E.C. Secretariat should be asked to provide material for the use of the Assembly representatives in their discussion with the Congressmen on these points.

41084—1 Finally, I circulate for information a record of a statement made by the German Federal Chancellor at a small dinner party given by M. Stikker on 3rd August at which there were present the French, Netherlands and Norwegian Ministers for Foreign Affairs, the Belgian Minister of Trade and Commerce, the Italian Under-Secretary of State for Foreign Affairs (Emigration) and myself. The second part of the statement, dealing with German views on the Soviet threat and on the question of a German contribution to Western defence, will, I think, interest my colleagues in the light of the Cabinet's recent discussions on this subject. The remainder contains some interesting comment on the internal situation in Germany.

H. M.

*Foreign Office, S.W. 1,*

16th August, 1951. I entirely agree with the view expressed by a number of my colleagues that, when we have these meetings of Foreign Ministers, we should take the opportunity to exchange views on the general situation. It is not easy for us to fit in all the engagements which crowd upon us in these days and I do not think it is necessary to arrange special meetings for this purpose. Far better make use of occasions such as this when we are assembled for other reasons. This has also the advantage that less attention is drawn to such discussions and we avoid arousing the expectation that positive or striking decisions are to be taken. I think such exchanges can only be really useful if they are strictly confidential and not intended to be the subject of any communique, and I also think that they must be regarded as happening outside the strict orbit of the Council of Europe, so that, if we wish to do so, we can exchange views on a wide variety of matters without prejudicing the principle, to which as you know the British Government—and several other Governments—attach importance, namely, that defence is outside the scope of the Council of Europe.

On this basis I am glad to have the opportunity of giving my colleagues a brief outline of how I see our situation at the present time: the problems which concern us for the future and the measures which we must take individually and in common for the safety and welfare of our peoples.

In the course of my remarks I shall try to convey to you the sense of balanced and assured confidence which animates the British people at the present time despite all the clouds on the horizon, and which I am sure ought to be shared by the rest of us in Europe. In any case, as confidence is said to be infectious, I make no apology for speaking of our confidence.

I think on the whole we can say without any doubt that we have had a successful year, and I am speaking of Europe as a whole and of the West as a whole. Our general calculations and the policies which we have based on them, have proved themselves correct. We have all known for a long time that these were going to be dangerous years and that between the moment when we first recognised the need to strengthen ourselves and the moment—unfortunately still some way ahead—when we can regard our defences as adequate, there would be severe tests on our nerve and courage. Each step we ourselves have taken to strengthen our community has been fraught with a certain amount of risk; and of course each time we have had to stand firm against moves by the other side, we have also taken a risk. But we have faced these risks, and we have proved justified. We find ourselves here, towards the end of 1951, with quite a series of successes behind us, with unimpaired unity and steadily growing strength. Western Europe has lost no ground since the fall of Czechoslovakia in 1948 and no one has dared to interrupt us in our measures of defence and of resistance. On this, I certainly think we can congratulate ourselves; and from this we can draw lessons as to how we should behave in the future.

To be more specific: our main successes in the past year—apart from the successful resistance to aggression in the Far East—have been:

First: our refusal to be divided by the efforts of Soviet propaganda or deterred from what we know to be necessary for our independence and freedom. (And I must mention as a particular instance the success with which the West avoided being divided over the negotiations for a Foreign Ministers Conference.) It was not easy, as my French colleague knows and as my United States colleague knows;

Second: the establishment of a joint Command in Europe under one of the most widely respected figures of our time, and the increase of Allied forces on the Continent; and

Thirdly: the substantial start which we have made with the financial and industrial problems inseparable from any defence effort.

In another realm of ideas, we must—as Europeans—congratulate ourselves on the continuing and even increasing interest which the United States Government... and people have shown in the security and welfare of Europe, and their continued recognition—despite many temptations to the contrary—that Europe is the key to the defence of the free world and must have priority over other theatres. This is of vital importance to us all. It is not so long ago that we were wondering whether, as Marshall Aid tapered off, we should be able fully to retain the material and moral support of the United States. We have done so in the fullest sense.

And, finally, we have continued to be successful in building up understanding and co-operation amongst ourselves. We have done our international work in Europe with growing confidence; and little by little it has become less easy in a hundred ways for individual countries to adopt selfish or sectarian courses where the common interest is involved.

We have welcomed the German Federal Republic into the Council of Europe; we have acted in many fields in concert with the O.E.E.C. which, among other activities, brought into successful operation the European Payments Union and this has rendered possible a great increase of inter-European trade; we have seen an independent Yugoslavia steadily affirm itself and its relations with the rest of us gradually improve; we have been conscious of a very definite European point of view emerging in matters relating to peace and war in the Far East and elsewhere; we have seen the normalisation of diplomatic relations with Spain.

To each of these things which I have mentioned, some of us—or several of us—may feel inclined to make reserves, I know. But the point is that if we look at the situation as a whole, the current has been towards reconciliation in Europe, and this current is still in full flow. In my opinion it does not matter if the forms and constitutional structure of union are not so far advanced as some might wish, so long as the reality of our relationship moves towards unity.

In fact, if I may say so, I think that a lot of us, especially here in Strasbourg, pay far too much attention to the forms and too little to the reality.

The main emphasis, then, in all the aspects of our present problem should be on unity. Subject to proper and necessary clashes as to political and economic ideals, unity at home between the different groups and classes of our free society (subject to proper and necessary clashes as to political and economic ideals); unity of action and mutual comprehension amongst the diverse national and international groups which make up the free world. I want to say something about both these two forms of unity.

First, as regards the sociological essentials of internal unity, the task is to create a balanced, just and contented society in which communism will find no appeal and whose natural vitality and cohesion will prevent its being infiltrated by dictatorial doctrines. To get this we must have social justice and fair sharing of economic advantages, and we must have the internal discipline sufficient to ensure these things. But at the same time we must have liberty also. I do not know how the requirement can be better expressed than in the words which inspired the French Revolution, “Liberty, Equality and Fraternity,” provided we give a new meaning to the words “Liberty” and “Equality” and relate them to the conditions of the twentieth century. Fraternity is a constant in human desire and perhaps needs no redefinition.

Now it is in the redefinition of equality that I venture to think Great Britain to-day has something to offer. Frequently we are called upon by good friends to give Europe a lead and equally often we are told that we are not giving this lead. Well, perhaps it would be a good thing to have a careful look at this matter, in which, I maintain we are giving a very definite lead which we invite—indeed are challenging—all to follow. I mean in the elimination of communism at home by the creation of conditions where it does not flourish. There is no easy recipe for this. It is not so easy, anything like, as setting up an international authority or calling together a European parliament, even though these may be more high-sounding. It is a question of social discipline, of having an adequately controlled and efficient fiscal and economic system, of sacrifice by the privileged and some austerity for all. It is a question of social discipline, of having an adequately controlled and efficient fiscal and economic system, of sacrifice by the privileged and some austerity for all. It is a question of ensuring the right and the duty to work, that is to say, of maintaining a policy of full employment together with the principle of full social obligations; it requires a colossal effort on the part of a nation and at the same time great patience and care to combine control with liberty. Politically it demands stable parliamentary institutions and a general respect for government. But the reward is worth working for—a free country to which all classes are equally loyal. We cannot be satisfied with the state of Europe, nor can our defence efforts give us any real assurance of security, until we have eliminated the material and emotional causes of communism in our midst. I would go further and say that you cannot expect to see constitutional union in Europe until all the countries have more or less equally succeeded in eliminating these internal weaknesses. Unity, in fact, like many other desirable qualities, begins at home.

So that is the trumpet which I intend to blow next time I am asked that Britain should give a lead.

In international affairs there are other kinds of unity. I suppose we should all agree that the over-riding thing is to maintain unity between Europe and the North American continent and that one of the most dangerous things that could happen to us, apart from the spread of Communist doctrine itself, would be any growth of anti-American feeling amongst our own people, or anti-European feelings among the Americans. We all have a responsibility for watching this at both ends. In the United States we ought to consider that the good reputation of any one of us enhances the good reputation of us all, and that we all suffer if there is criticism of any one of our European nations. The true European spirit is to show a certain loyalty to one another when dealing with a wider audience, and I can assure you that you will not find British official spokesmen, if I can help it, criticising other European nations in the United States.

As regards European opinion, there may be occasions when we can offer advice to the Americans themselves on how certain aspects of their policy and actions might be better presented from the European point of view. In one matter, in particular,—publicity—it will certainly be right for us as Europeans to be the judges of how best to present our common policies in our own countries, and this is a principle on which we have insisted in the North Atlantic Treaty Organisation. Then again, in certain political matters we have been right to make our specifically European difficulties known, and I think we should continue to do so. We also have a common interest in ensuring that there shall be broad equality of sacrifice over the whole Atlantic community in meeting the dangers which threaten the West; in other words, that the contributions of all shall bear relation to their capacity. This does not mean that any one of us can go easy and rely on others to make up for our slackness. This principle, too, has been accepted in the North Atlantic Treaty Organisation, but I mention it here because it seems to me to have a wider application. Generally speaking it is an essential interest of us all as Europeans that the standards of sacrifice and effort which are applied to us should apply equally over the whole of the Atlantic area and that we should not allow ourselves to get into a position where Europe, so to speak, sits on one side of the table and the North American continent on the other. We are aiming for a community of the West; a joint enterprise in which the sacrifices and the benefits are equally shared.

The second field in which unity must be preserved and in which the United Kingdom Government has a particular responsibility is the sterling area combination, and, closely associated with it, the British Commonwealth of Nations. I do not think anyone will deny the importance of maintaining these combinations or disagree that the United Kingdom Government and people must set aside a large part of their energies and resources to that end. It is not only a question of the economic and financial importance of the sterling area; there is also the fact that the Commonwealth represents one of the main ties linking free Asia with the West and may consequently play a vital part in preventing the spread of communism throughout the whole of Asia. It would be a big mistake to ignore or underrate this part of what we are trying to do for the unity of the free world.

Thirdly there is unity in Europe. I have already spoken about the strong current of reconciliation and co-operation which is bringing us closer together every day in all our affairs, but I want now to say a word about the more specific proposals for setting up institutions of a supranational character which are under discussion in Europe to-day. I mean, of course, primarily the Schuman Plan and the plan for a European Army, though there are other proposals of a similar nature which have not yet reached so advanced a stage. I want to make it clear that the United Kingdom Government have nothing but goodwill towards schemes of this kind, which are designed to bring together in specific fields certain European countries who feel disposed to unite in this way. The fact that, for various good reasons, we do not at present feel able to join such organisations should not be taken as implying any opposition to them or any reluctance to see them succeed. We want them to succeed, and as we have made clear in public statements, we shall always be ready to examine the possibility of being associated as closely as possible, and of co-operating in the most practical way with any authorities which emerge from these schemes. It is to be anticipated that one such authority may emerge from the Schuman Plan Treaty as soon as this is ratified by the Parliaments concerned, as we hope it will be.

As regards the European Army, I would like to say that we have been following with close interest the progress of the Conference in Paris and are now studying the interim report which has been produced. Clearly there are a large number of important questions, especially on the military side, which have still to be cleared up, and it will be necessary to ensure that the whole plan fits in with the requirements of North Atlantic Defence and is acceptable to the Supreme Allied Commander in Europe. Subject to that, however, I can say that we wish the Conference success and shall look forward to hearing how its further studies progress.

These then are the four main areas in which we must cultivate unity; unity based on social justice at home; unity amongst the Europeans; unity of the whole European and North American community, and the ties of the Commonwealth, especially with Asia. They are four aspects of the struggle for the survival of what we loosely call "the West" or the "free world," and so long as we cultivate them all and neglect none of them, we shall certainly win through. No single one is valid without the others, but all are complementary to one another. If we keep these realities before us, there ought to be no difficulty about surmounting the problems of defence, the problems of inflation and raw materials shortages or any of the physical or moral problems which may confront us. But we must work, we must have more production and more equal sacrifice. A greater economic effort would itself improve morale by giving our peoples the feeling that things are on the move, and the more speedy and effective are our preparations of defence, the more certain is the maintenance of peace. Therefore, while we keep our eyes open for any chance of a settlement with the Soviet Union, we must redouble our national efforts for defence. I am not one of those who despair of any settlement with Soviet Russia; I think it may be possible when they realise that we are strong enough not to be pushed around. You will have seen recently various signs which suggest that there might be a new policy in Russia. There has been the move for a cease-fire in Korea, and the publication of an English language paper in Moscow, which seems to speak of the possibility of understanding. It is tempting to be encouraged by these things. But if you look at the reply which Pravda has made to my message, you will see that when it is a question of something which is going to be read widely inside Russia, there is no real abandonment of hostility towards us. I think the Pravda reply, by Communist standards, was fairly mild; but it does not suggest any real attempt to open up, or to remove the misunderstandings which have been wilfully built up in the Russian peoples' mind about the West.

So I say we must wait for deeds as well as words, and we must not lower our guard until we see the real evidence of conversion and of a will for friendship. If we were to relax our efforts prematurely, we should be guilty of betraying the cause of peace. Each nation must concentrate on its own contribution and its internal morale and self respect, and we must not be diverted from this.

We must have confidence in ourselves and our peoples, we must ensure that everybody's heart is in the job and that the civilisation which we are defending is a just and acceptable civilisation, worthy of being defended and genuinely based on the eternal principles of liberty, equality and fraternity. STATEMENT BY THE GERMAN FEDERAL CHANCELLOR AT MR. STIKKER'S DINNER PARTY AT STRASBOURG ON 3RD AUGUST

The Ministers present were:—

Mr. Stikker. Mr. Morrison. M. Schuman. M. Lange. Dr. Adenauer. M. Meurice (Belgian Minister of Trade and Commerce). M. Dominedo (Italian Under-Secretary).

Mr. Morrison was accompanied by Sir E. Hall-Patch and Mr. Shuckburgh and the other Ministers had one adviser each.

Dr. Adenauer, whose remarks were translated into English by Dr. Hallstein and into French by M. Schuman, spoke from a prepared text.

He began by saying that the German people were not properly understood abroad. There was mistrust in certain countries of democratic Germany and this mistrust was, of course, fed by the reports (which were often exaggerated in his view) of the activities of the Socialist Party of the Reich under Herr Remer and of the various ex-soldiers' parties. People seemed to be afraid that if Germany were given arms she might use them to side with Soviet Russia against the West, or demand the unification of Germany by force, or seek a position of hegemony over the other European peoples. Dr. Adenauer said that he proposed to speak very frankly and openly, not as Chancellor but as a German who was deeply interested in creating a new Europe into which the German people would be securely integrated.

He said that to understand the present position in Germany one must know something of the deep psychological and social upheavals which had occurred since 1918. There had never been true democracy in Germany before 1918, since the German Empire had been dominated by Prussia and under the Prussian system the mass of the people had no political influence. The transition to a democratic constitution in 1918 had been too sudden and there had been no chance for democratic practice to grow before the inflation which "proletarianised" the middle classes. Out of this had been built the evil system of nazism, and when this collapsed in the Second World War all authority except purely local authority was destroyed in Germany.

The victorious Allies unfortunately had not taken the necessary steps after the war to win Germany for the West. It was not until 1947-48 that Germany had been allowed to start out on the path of economic recovery. The result was a state of acute insecurity and fear for the future. This was the atmosphere in which the Remer Party had been created. It must be carefully watched by the German Federal Republic though he did not consider it a dangerous movement at present. It was natural that there should be some relics of nazism still lingering in the German mentality and the Russians were the first to avail themselves of this. The Socialist Reichspartei was financed by the Soviets and its head was a Russian tool. The German Federal Government unfortunately could not give proofs of this to German public opinion without giving away their sources of information, but he could assure the Foreign Ministers present that he had photographs of cheques paid to the party by the Russian Occupation Authorities.

As regards the soldiers' associations and the various meetings and speeches to which so much attention was given in the foreign press, it was necessary to take account of the following factors. The desire of former soldiers to club together in such associations after a calamitous war was in itself quite natural and existed in other countries; but in Germany the Army had been defamed and its honour impugned after the war. It had been blamed for all the crimes committed by the Nazis and by a very small element in the Army. The higher officers, many of whom were decent people, had been treated with great lack of psychological understanding and justice. They had been put to manual work regardless of their rank. He personally had known cases of senior officers who could hardly keep themselves alive by manual labour and there had been numerous suicides. The war crime trials, comprehensible in the heat of passion immediately after the war, had been spun out and there were several hundreds of prisoners still in a certain Western country for whom no trial had been arranged. Despite all this, there would probably not be very strong feeling amongst former German soldiers, and in any case it would have gradually disappeared, had it not been for the suggestion of a German contribution to Western European defence. The possibility of creating German forces again had stirred up the ex-officers, and many of them thought—wrongly—that they would have a better chance of participating in the new forces if they took a lead in the military associations. That was why these associations had sprung into prominence recently. Unfortunately, Germany had 2,000 former generals. There was great rivalry between them and this led, he admitted, to unsuitable and improper expressions and actions. This would pass, but it was important not to let these elements become enemies of the State, which, he was glad to say, they were certainly not at present, except for the Bruderschaft. There were no disquieting National Socialist tendencies except in this one group which, as he had said, was closely linked with the Soviet Occupation Authorities.

Another great danger for Germany was the refugees, the “expellees” and the homeless victims of bombing. Shortage of houses was a much greater danger to democracy in Germany than the activities of former officers, and would remain for years one of the heaviest responsibilities of the Government.

Dr. Adenauer then turned to the Soviet threat. He said that the Soviets had taken over the expansionist policy of the Tsars, but that since they were able by the Communist system to co-ordinate all the forces of the nation they had a much better chance than the Tsars of overthrowing Europe. Their principal aim, in his opinion, was to absorb the German Federal Republic in the Soviet system. All other aims were subordinate to this. If they could obtain the industrial and human potential of Western Germany, then all Europe would be at their mercy; the United States would cease to take the same interest in European defence and the fate of Western civilisation would be sealed. The Soviets desired to attain this end first by cold war methods and primarily through the activities of the Communist Party. Generally speaking, the Germans were immune to communism, knowing from their prisoners of war and “expellees” what communism means, so the Soviets were trying to weaken German resistance by supporting right-wing radical groups and by creating fear. He did not think that the people in Western Europe had any idea how damaging to the psychological resistance of the German people was the fear created by the 25 to 30 heavily armoured Communist divisions in the Soviet Zone. When people were woken in the night by the passage of Allied transport through the streets their first thought was that the Soviet tanks had arrived, and even the sound of friendly aircraft overhead reminded them of this ever-present terror. The Soviet Union knew that so long as Western Germany was demilitarised it would be only a question of time before it fell into the Soviet sphere. The Allied Occupation troops would not always be sufficiently strong. “To neutralise or demilitarise Western Germany by treaty, and prohibit her from protecting her neutrality with her own forces, would be absolutely fatal. This idea, which has been advocated by Professor Noack and his friends, is directly attributable to the Russians with whom Professor Noack has direct contacts.” The strong reaction of the Russians to the suggestion of a German defence contribution showed that they recognised that it would involve the integration of Western Germany with the West and thus end the prospects of absorbing her into the East.

Dr. Adenauer said he thought the present tensions with the Soviet Union would probably subside without a shooting war, but that there would remain a constant threat from Russia, who was now firmly established in the heart of Europe and whose pan-Slav and totalitarian traditions would compel her to expand whenever opportunity arose. The United States would not for ever keep troops in Europe, and Europe itself must therefore take lasting and effective measures against Soviet expansionism (with such assistance as the United States might offer). This was only possible if Europe was genuinely united. The Pleven Plan was, to his mind, the only possible method of protecting Europe permanently. The North Atlantic Treaty Organisation aimed rather at the present threat and at maintaining peace in the coming years; it would not meet the long-term need.

Dr. Adenauer said that he did not regard the state of Germany as dangerous, though there were elements in it which might become dangerous if not watched. He personally had known cases of senior officers who could hardly keep themselves alive by manual labour and there had been numerous suicides. The war crime trials, comprehensible in the heat of passion immediately after the war, had been spun out and there were several hundreds of prisoners still in a certain Western country for whom no trial had been arranged. Despite all this, there would probably not be very strong feeling amongst former German soldiers, and in any case it would have gradually disappeared, had it not been for the suggestion of a German contribution to Western European defence. The possibility of creating German forces again had stirred up the ex-officers, and many of them thought—wrongly—that they would have a better chance of participating in the new forces if they took a lead in the military associations. That was why these associations had sprung into prominence recently. Unfortunately, Germany had 2,000 former generals. There was great rivalry between them and this led, he admitted, to unsuitable and improper expressions and actions. This would pass, but it was important not to let these elements become enemies of the State, which, he was glad to say, they were certainly not at present, except for the Bruderschaft. There were no disquieting National Socialist tendencies except in this one group which, as he had said, was closely linked with the Soviet Occupation Authorities.

Another great danger for Germany was the refugees, the “expellees” and the homeless victims of bombing. Shortage of houses was a much greater danger to democracy in Germany than the activities of former officers, and would remain for years one of the heaviest responsibilities of the Government.

Dr. Adenauer then turned to the Soviet threat. He said that the Soviets had taken over the expansionist policy of the Tsars, but that since they were able by the Communist system to co-ordinate all the forces of the nation they had a much better chance than the Tsars of overthrowing Europe. Their principal aim, in his opinion, was to absorb the German Federal Republic in the Soviet system. All other aims were subordinate to this. If they could obtain the industrial and human potential of Western Germany, then all Europe would be at their mercy; the United States would cease to take the same interest in European defence and the fate of Western civilisation would be sealed. The Soviets desired to attain this end first by cold war methods and primarily through the activities of the Communist Party. Generally speaking, the Germans were immune to communism, knowing from their prisoners of war and “expellees” what communism means, so the Soviets were trying to weaken German resistance by supporting right-wing radical groups and by creating fear. He did not think that the people in Western Europe had any idea how damaging to the psychological resistance of the German people was the fear created by the 25 to 30 heavily armoured Communist divisions in the Soviet Zone. When people were woken in the night by the passage of Allied transport through the streets their first thought was that the Soviet tanks had arrived, and even the sound of friendly aircraft overhead reminded them of this ever-present terror. The Soviet Union knew that so long as Western Germany was demilitarised it would be only a question of time before it fell into the Soviet sphere. The Allied Occupation troops would not always be sufficiently strong. “To neutralise or demilitarise Western Germany by treaty, and prohibit her from protecting her neutrality with her own forces, would be absolutely fatal. This idea, which has been advocated by Professor Noack and his friends, is directly attributable to the Russians with whom Professor Noack has direct contacts.” The strong reaction of the Russians to the suggestion of a German defence contribution showed that they recognised that it would involve the integration of Western Germany with the West and thus end the prospects of absorbing her into the East.

Dr. Adenauer said he thought the present tensions with the Soviet Union would probably subside without a shooting war, but that there would remain a constant threat from Russia, who was now firmly established in the heart of Europe and whose pan-Slav and totalitarian traditions would compel her to expand whenever opportunity arose. The United States would not for ever keep troops in Europe, and Europe itself must therefore take last and effective measures against Soviet expansionism (with such assistance as the United States might offer). This was only possible if Europe was genuinely united. The Pleven Plan was, to his mind, the only possible method of protecting Europe permanently. The North Atlantic Treaty Organisation aimed rather at the present threat and at maintaining peace in the coming years; it would not meet the long-term need.

Dr. Adenauer said that he did not regard the state of Germany as dangerous, though there were elements in it which might become dangerous if not watched. The Government would have to undertake tremendous work in the social field and to oppose nationalist and neo-Nazi trends. They must take especial care to attract the youth. Unfortunately the German State at present had no attraction for the youth, not being fully sovereign and having no glamour. It was necessary that the German Government should acquire sovereignty as quickly as possible, so that the inhabitants might learn to respect and love it. The Allies could assist in this and thus strengthen democratic ideas in Germany.

If there were to be a German contribution to Western defence, the selection of higher officers must be done with the greatest care. He would appoint only those officers who were strictly reliable, faithful to the democratic constitution and not involved in politics. “We are quite aware that we must select officers with the greatest possible care. We do not in any circumstances want to encourage undesirable developments. Thus, in the discussions on the Pleven Plan and in supplying information to the Allies at the Petersberg talks, I put in charge a man whom I regard as absolutely reliable—Herr Blank—who is one of our younger trades unionists and who understands fully my own intentions. I should never give supreme authority in this field to a soldier.”

Nowhere was the European idea so popular as in Germany, Dr. Adenauer concluded. The Germans always needed an ideal to follow. History had destroyed their dreams of a Greater Germany and the ideal of a united Europe now provided the only possible alternative. The European idea was particularly attractive to the Germans because they knew of the Soviet threat and the Soviet terror, and the vast majority of them would be ready to contribute immediately and permanently to a European system of defence. This would involve no threat of a revival of nationalism.

But if Germany were not soon given sovereignty and integrated into the West through a defence contribution it might well become a prey to Soviet expansionism.

Mr. Stikker, speaking in German, thanked Dr. Adenauer for his remarks, which, he said, had given his colleagues plenty of food for thought. He did not consider, in view of the lateness of the hour, that there could be any discussion, but he hoped that similar opportunities for informal exchanges of view would occur on future occasions. CABINET

THE MAN-POWER POSITION ON THE BRITISH RAILWAYS

MEMORANDUM BY THE MINISTER OF TRANSPORT

At its meeting on 26th July the Cabinet invited the Minister of Defence to arrange for officials to examine urgently the proposals which I put to them in my paper C.P. (51) 215 of 19th July, that, as an alternative to deferment, railwaymen called up for National Service should, after basic training, be returned to the railways on reserve (C.M. (51) 55th Conclusions, Minute 5).

2. This examination has now taken place and I understand that these proposals are unacceptable to the Service departments, partly because existing training resources are inadequate for the purpose and partly because the training period, if it were long enough to be of any value to the Services would be too long to enable any substantial help to be given to the railways. I understand that, in fact, the Services would regard this alternative to deferment as worse than deferment itself, and that the Ministry of Labour and National Service do not consider that it offers advantages over deferment in meeting their particular difficulties.

3. I must therefore ask my colleagues to give further consideration to my request for a limited measure of deferment as set out in my previous paper. The total number for whom deferment is thus sought is about 2,900. When I submitted my previous memorandum this was made up of firemen (1,162), the promotion grades for firemen, guards, shunters and signalmen (1,645) and permanent-way, signal and telegraph maintenance staff (69). These figures will have altered slightly since then, but remain of the same order.

4. My Department have examined in detail with the British Transport Commission and the Railway Executive the prospects of keeping traffic moving on the railways this winter, and the position is serious. The number of vacancies in the railway footplate staff in areas of acute shortage have increased from over 3,800 at the beginning of the year to over 4,700 at the end of June. There is no reason to expect any improvement in ratio of staff recruitment to wastage during the autumn and winter when working conditions worsen. At the end of June, 225 booked freight trains were cancelled daily because of staff shortages, and work in the marshalling yards was seriously slowed down by lack of crews for shunting engines.

5. In consultation with the National Coal Board, the railways have planned for a maximum diversion of coal to road and coastal shipping, but even so, they expect to have to move an additional million tons of coal alone in the 16 weeks beginning 10th September. There are increases to be expected in other traffics.

6. The Railway Executive are planning cuts in passenger services of varying orders of severity. These cuts are, of course, useless unless they throw up men who can be used in the areas of traffic congestion, and they must therefore be planned with care if useless injury to the country's travel is to be avoided.

7. If no relief can be given from their man-power obligations to the Services, the Railways will have no alternative but to cut passenger services to a standard generally below that obtaining during last winter's coal shortage. In addition, they would find it impossible to run some 500 to 600 freight trains (including empties) of those they expect to be required daily for the autumn and winter traffic. If priority is to be given to coal, this would mean shutting out some ½ million tons of other traffic each week. Such a position is, of course, untenable. No absolute priority could be given to coal, and the accumulation of traffic at this rate would have a disastrous effect upon the country's economy.

8. I am satisfied, and I think the Minister of Labour and National Service will support me, that the Railways are doing all they can to meet their difficulties from their own resources. It is unnecessary to recapitulate their difficulties. I am bound to say that I do not think they are getting all the help they should from the Unions, but even if the latter could be brought to agree to a more efficient use of footplate staff, it would not go very far to meet current difficulties.

9. If a breakdown this winter is to be avoided, I can see no alternative but to agree that the Railways should be allowed to retain the men they have in the areas where they are so short. This will do something to alleviate matters, and, in conjunction with the special measures which the Railways are themselves taking, will, I hope, prevent acute trouble. Serious operating difficulties will undoubtedly remain and a long-term solution of the man-power problem has yet to be found.

A. B.

Ministry of Transport, W. 1, 3rd September, 1951. CABINET

GERMAN DEFENCE CONTRIBUTION: ECONOMIC AND FINANCIAL IMPLICATIONS

Note by the Prime Minister

I circulate for the consideration of my colleagues a report prepared by an interdepartmental committee of officials on the economic and financial implications of a German military contribution to Western defence.

C.R.A.

10, Downing Street, S.W.1.,

30TH AUGUST, 1951. ANNEX

ECONOMIC AND FINANCIAL IMPLICATIONS OF A GERMAN MILITARY CONTRIBUTION TO WESTERN DEFENCE

REPORT BY THE MUTUAL AID COMMITTEE

1. His Majesty's Government have agreed in principle to the creation of a German military force for Western defence because if Europe is to be safe from enemy occupation it must be defended in Germany, and, because the Allied forces available are inadequate for this purpose, with German military assistance. They have, however, always reserved their right to consider the timing and nature of this contribution (C.M. (50) 59th Conclusions, Minute 1, and C.M. (51) 56th Conclusions, Minute 6). The question of a German military force has now become inextricably associated with the development of our political relationship with Germany in Western Europe. A decision on a German force cannot with safety be deferred much longer without serious political repercussions in Germany itself. Final decisions on these matters may, therefore, have to be made within the next few months and the purpose of this paper is to draw attention to certain aspects other than those primarily of military and political concern of which account must be taken.

2. It has become evident that the raising of a German military force will have considerable economic repercussions both on the German economy and on the economies of the Occupying Powers. This report has accordingly been prepared by the Mutual Aid Committee on the basis of information at present available in order to set out the economic and financial implications, particularly for the United Kingdom, of raising such a contribution to European or N.A.T.O. forces and to indicate the issues on which policy decisions will eventually have to be taken.

The scale and nature of the contribution now being made by Germany to Western Defence

3. Western Germany is already required to provide considerable sums for the maintenance of Allied forces in Germany. These are charged to the German budget on a mandatory basis as Occupation costs even though the function of the Allied Forces has changed from that of an occupying army to that of providing the outer shield for the Western countries against Russian aggression. These costs may be summarised as follows:

| Year | Occupation costs | Mobile police | Total | |----------|------------------|---------------|-------| | 1950-51 | 4.3 | Nil | 4.3 | | 1951-52 | 7.9 | 2 | 8.1 |

4. Thus, in 1950-51 Germany spent between 5 and 6 per cent. of her national income on purposes related to Western defence, and is being called on to pay between 7 to 9 per cent. in 1951-52, although full budgetary provision has not yet been made for expenditure at this rate. The Federal Government has also been furnishing aid to Berlin, which is in the nature of a defence contribution, at the rate of DM. 600 million a year. In addition, some DM. 4-2 milliard is spent on refugees and on the prevention of social unrest, which the Germans consider—although we do not—should also be regarded as part of their contribution to defence.

5. Of the total of Occupation costs for 1951-52, the United Kingdom share is DM. 2-08 milliard, or approximately £175 million. Of this share, however, only £140 million is expended on the maintenance of the British Forces and the Control Commission—a figure which may rise to as much as £180 million by 1952-53 owing to rises in prices and reinforcements. This, broadly speaking, is the measure of the financial interest at stake for the United Kingdom in any new arrangements affecting Germany's contribution to defence.

6. The capacity of the German people to pay Occupation costs at the proposed scale is being increasingly debated in Germany. The German Government and, through it, German public opinion is growing more hostile, especially because of the mandatory nature of the impost. To meet the bill the Allies have presented, increased taxation and economies elsewhere are essential, but the rigidly Federal character of the German constitution, general tax morality and growing resistance to Occupation costs make this peculiarly difficult. An approach from the Federal Chancellor for financial help in some form is to be expected. Thus, even without the complication of the German defence contribution it is not to be expected that we could much longer continue to obtain Occupation costs on the full scale proposed for 1951-52.

Consequences of a German military contribution

7. If Germany has now to make a direct military contribution for which she must be in some measure financially responsible it will affect the situation as it exists at present in three ways:

(i) A German military contribution will have to be paralleled in the political field by the placing of most of the powers at present reserved to the Allies on a contractual basis. It must be assumed that in this process we shall no longer be able to retain our present right to levy charges for the cost of Allied forces in Germany upon the German budget without prior German consent. Since we shall be dealing with a problem of German partnership in Western defence rather than the occupation of Germany by Allied forces, there would indeed be little justification for the maintenance of the present arrangement. The mandatory system, as we know it at present, will, therefore, come to an end.

(ii) It may be anticipated, though it cannot be proved, that it will be easier for the Germans to raise money to support a German military contribution rather than in aid of compulsory Occupation costs. For this reason, and also because of economic progress, it may be assumed that Germany's capacity to pay will increase.

(iii) On the other hand, the cost of the direct German military contribution will clearly fall heavily, particularly during the period of re-equipment, on the German budget; the Germans will claim that it should have a priority higher than that of contributions to the Allied forces, and whatever we may do it may in practice be difficult to ensure that the latter does not have second place.

German capacity to pay

8. The three elements of the Allied High Commission have stated that the best estimate which they can make of German ability to contribute to Western defence in the present circumstances, i.e., in Occupation costs, is DM. 9 milliard. It should, however, be noted that the contribution in its present form does not occasion any industrial dislocation nor any balance of payments problem comparable to that caused by defence expenditure elsewhere. We consider that, if Germany is making a direct military contribution, the provision of at least DM. 10 milliard, rising later to DM. 12 milliard or even more, should not place an impossible burden upon her economy, nor, with proper safeguards, need it lead to inflation with its undesirable financial and political consequences. At the same time, a contribution on this scale would, in terms of percentage of National Income, bear a reasonable relationship to the contribution of, say, the United Kingdom and France.

The cost to the German Budget of a Military Contribution

9. Until agreement has been reached on the size, nature and timing of a German military contribution, estimates of its cost to the German economy are of necessity highly speculative. With every possible reserve as to the resultant calculation we have made certain assumptions under the following heads, based on the discussions between the representatives of the Federal Government and of the Allied High Commission at Bonn, and such preliminary examination of the German proposals as has already taken place. (a) Size

We assume that whether a contribution be made direct to the N.A.T.O. forces under General Eisenhower or through the medium of a European Army, the ground forces will not be allowed to exceed at any time 20 per cent. of the forces at General Eisenhower's immediate disposal, or ultimately approximately twelve divisions, with appropriate tactical air support. We also assume some light naval forces and coastal defence for the Baltic.

(b) Timing

Having regard to the international negotiations which must first be completed, the national planning and passage of legislation required in Germany, and the setting up of training establishments, we have assumed that actual recruitment of the rank and file could not commence before October 1952 and full strength could not be achieved until 1955.

10. Starting from these assumptions we have examined the Germans' own estimates of costs of a military contribution as put forward in the Bonn discussions. These envisaged a total capital, or "non-recurrent," expenditure on arms, equipment, works and buildings, &c., of approximately DM. 20 milliard, and an annual expenditure of DM. 2-2 milliard. We have then sought to estimate the probable cost in each of the three years after 1952 likely to fall on the German economy. We have in our estimates taken considerable liberties with the German figures to accord with our own assessment of probability, of which the most important modifications are:

(i) We have made adjustments to allow for an ultimate force of 350,000 as opposed to the German figure of 250,000, in order more realistically to reflect the man-power requirements of 12 Army divisions.

(ii) We have assumed a smaller air force.

(iii) We have assumed that all heavy arms will be provided free by the United States and made heavy reductions on the German figures to allow for the fact that they appear to be in part based on United States prices and possibly on over elaborate scales of provisioning. This reduces the total German capital expenditure by about two-thirds.

(iv) We anticipate that the expenditure on works and buildings will be spread over four years.

11. As a result we estimate that a possible rate of expenditure by Germany on German armed forces might be:

| Year | 1952-53 | 1953-54 | 1954-55 | |--------|---------|---------|---------| | £ | £100 million | £340 million | £500 million | | or DM. | 1·2 milliard | 4·08 milliard | 5·9 milliard |

These figures are subject to many reservations, but may serve as illustrative of the possible order of magnitude of the costs involved. Expenditure in subsequent years might be at less than the rate for 1954-55 as the initial equipping and construction would have been completed, but we doubt the utility of attempting any estimate so far ahead.

12. The background against which the estimates in paragraph 11 were framed is, however, extremely uncertain. The Germans will, of course, be anxious to increase the strength of their Armed Forces as quickly as possible; they estimated at Bonn, for example, that the whole of the non-recurrent expenditure of DM. 20 milliard would be incurred during the first year of their build-up. American pressure will certainly be applied in the same direction and it may be that our ideas of the relatively low priority on which the Germans should be supplied with heavy equipment from America (with its retarding effect on the rate of build-up of their Armed Forces) will not be accepted by them. To the extent that the Americans are unable or unwilling to supply arms from their own production at the rate which they regard as necessary for the build-up, they might press for the manufacture in Germany of heavy military equipment on the N.A.T.O. prohibited list, and substantial German expenditure might thus arise towards the end of the three-year period covered by the estimates in paragraph 11. It may be too that the Germans will be able to complete their works programme more quickly than we have assumed and that its cost over which we shall have no control will be substantially higher. For all these reasons the rates of German expenditure on their forces given in paragraph 11 may prove to have been considerably under-estimated.

13. If support for the Allied Forces and expenditure on Berlin were to continue at their present scale, and if the cost of the German military effort were added in accordance with our estimate in paragraph 11 the cost to the German budget would be:

| Year | Milliard DM | |----------|-------------| | 1951-52 | 8.7 | | 1952-53 | 9.90 | | 1953-54 | 12.78 | | 1954-55 | 14.6 |

On the basis of these very tentative figures, it could be argued that, allowing for some increase in German national income over the next five years, the Germans could shoulder the whole of this burden. But as has been explained, our estimates may be too conservative, and there will in any event be extreme difficulties in inducing them to make a fair defence effort particularly when the cost of supporting the Allied Forces represents so large a proportion of the whole. We must expect to be under constant and increasing pressure for reductions, and it will require a firm and united stand by the United States, and United Kingdom and France not only to obtain acceptance of the principle of a German payment for the maintenance of Allied forces in addition to a military contribution, but also to collect it year by year. We have therefore found it necessary to consider the consequences of the loss in whole or in part of what is now covered by Occupation costs.

Economic implications for the United Kingdom

14. Any reduction in the amount of our share of Occupation costs paid by Germany will impose an additional burden on the United Kingdom Budget and on our external balance of payments. To the extent that some part of the costs of maintaining United Kingdom troops in Germany ceases to be a charge on the Federal Budget, it must be assumed by the United Kingdom Budget. Furthermore, to the extent that Deutschmarks are no longer available to us free to make payments necessary in support of our forces in Germany, we shall have to pay sterling across the Exchanges. If Occupation costs were to be eliminated and present practice were to continue unchanged, the additional charge to the Budget, and the additional foreign exchange burden, would be approximately £150 million in 1951-52 rising to £180 million in 1952-53. This allows for the increase in United Kingdom forces in Germany now planned, but assumes the payment by Norway, Denmark and Belgium of the cost of maintenance of their contingents now met from our share of Occupation costs. We have therefore made some preliminary analysis of the items which make up this total, in order to indicate where possibilities of economy may lie, and what opportunities exist of substituting sterling for Deutschmark expenditure.

The present Deutschmark Costs of British Forces in Germany

15. About one-third of Occupation costs are spent on German labour, the balance being divided between capital works, transportation, living accommodation and public utilities. Compared with practice elsewhere, the standard of goods and services is high both in amount and cost, because of the mandatory system dating from the earliest days of the Occupation which hitherto has rendered normal financial control on our part unnecessary. But the principal factor is our use of German labour wherever we can. This is in accordance with the general policy applied wherever possible of employing civilians abroad to free Service man-power for training; conditions in Germany have hitherto been particularly favourable to this policy, and have permitted the use of Germans in administrative duties in combatant units, depots, workshops, &c., as an essential and integral part of the fighting services. Thus a total of 75,000 British personnel employed some 175,000 Germans at 31st March, 1951, of whom 141,000 were in support of the British fighting services.
16. There are three possible ways of finding economies:—

(a) The imposition of such economies as would be necessary to make standards comparable with those of other Commands (with reasonable regard to any special conditions in Germany). A number of economies have already been effected. Others are being vigorously pursued and might yield an eventual saving of 10 per cent.

(b) Possible financing of certain costs on an international basis. Any benefit to the United Kingdom would, under present international arrangements, be confined to the major part of airfield expenditure of £3.3 million in 1951-52 and over £9 million in 1952-53.

(c) A major change of policy in the employment of German labour. Any proposal to withdraw the German labour force employed in support of the British fighting services would entail a decision of policy of the first magnitude. To the extent that they were not replaced it would involve a reduction in the effective strength of the British forces in Germany. Their replacement would involve complete reorganisation of the British forces, changes in the distribution of existing man-power resources as between the three Services, and a reduction in the number of fighting units elsewhere, with a consequent material reduction in their fighting efficiency.

Even if the replacement could be effected without increasing the charge on the United Kingdom Budget, the charge on the balance of payments would not be reduced pro tanto, owing to the extra commitments which the accommodation, maintenance, &c., of extra military personnel in Germany would entail.

17. If both administrative economies were carried out and no German labour whatever were employed, with the evident disadvantages attaching to that course, the maximum theoretical saving in deutschmarks would be considerably less than 40 per cent.

Consequences for the United Kingdom Budget

18. While it may in these ways be possible to reduce the costs to the United Kingdom Budget to some extent, the risk remains of a substantial additional charge on the United Kingdom taxpayer which will have to be met either by a reduction in the United Kingdom defence expenditure elsewhere or by an increase in total United Kingdom defence expenditure. This clearly raises a major policy issue. On the one hand Ministers have affirmed (E.P.C. (51) 14th Meeting of 3rd July) that no further load is to be placed on the economy for defence purposes in addition to that necessary for the conclusion of the programme agreed upon in January; this means that (subject to consideration of the effects of any price increases) £4,700 million is the absolute limit of expenditure on defence which the country can stand over the next three years and the developments of the last nine months have made evident the gravity of the burden which this imposes on us. There is no need to emphasise the serious effect of reversing this decision and adding a burden of anything up to £400 million in real resources to the present defence programme. On the other hand, the object of a German contribution to defence is to increase the total forces available to Western defence, rather than to substitute a German effort for some part of our own. If, therefore, the result of any reduction made in our own effort were to reduce or delay our full provision for the N.A.T.O. command, the object would be in some degree defeated.

Consequences to the United Kingdom Balance of Payments

19. The effects on the United Kingdom balance of payments will, of course, depend primarily upon the amount of additional overseas expenditure falling on the Exchequer. If we were to cease to receive Occupation costs altogether, and no economies were effected, the additional overseas expenditure which we had to incur would be at the annual rate of £150 million in the current year, rising to about £180 million in 1952-53.

20. This would be a new and dangerously large burden on our balance of payments. The possible scale of the impact on our external economy would be about the same as the loss of Persian oil; the extent of the measures which would be required to offset it may be illustrated by the fact that the amount involved is equivalent to about 25 per cent. of our imports from Europe, or to about 15 per cent. of our world-wide exports of consumer goods. In particular, the complete cessation of Occupation costs would threaten us with a large and continuing deficit with the European Payments Union, to which we should inevitably have to pay substantial amounts of gold; this situation would incidentally have a seriously weakening effect on our influence in Europe, which, experience has shown, can be effective in economic matters only when our financial position is strong.

21. Conversely, there would be a great strengthening of Germany's external financial position, which would no doubt have an important bearing on Germany's strength and influence in Europe. This strengthening of her position would make it possible for Germany to begin to repay at any rate her post-war external indebtedness, and, if the full amount owing under this head to the United Kingdom could be repaid in three years, we should obtain relief to our balance of payments (and to the Budget) at the rate of approximately £60 million per annum. If the same principle could be applied to the matured portion of Germany's pre-war sterling debts, both Reich and private, further payments of £35 million a year would bring relief to the balance of payments to that extent (but not, of course, to the Budget). None of this could, however, be achieved save by agreement with the Americans and the French and negotiations with the Germans.

22. This balance of payments problem which is brought to light by the discussion of the future of Occupation costs is implicit in the arrangements which require substantial British forces to be maintained on the Continent. The fact that the Germans have been paying these very large local expenditures of our forces, as Occupation costs, has concealed the serious potential burden on our balance of payments which the location of our forces implies. This is precisely the same problem, in the context of the peace-time defence of Western Europe, as led to the great accumulation of indebtedness in World War II for the defence of India, Egypt and the rest of the Middle East.

Elements of a solution

23. It is therefore evident that, on both budgetary and balance of payments grounds, we must seek to avoid the economic effects on ourselves of a German defence contribution by endeavouring to obtain in one way or another a financial contribution to defence from Germany sufficiently large to cover both the military contribution and our essential deutschmark expenditure in Germany. We believe that it is economically possible for Germany to make such a contribution. But whether in practice these objectives can be achieved will turn on the willingness rather than the economic ability of the Germans to carry their financial share of the defence burden, and the firmness and solidarity of the United States, the French and ourselves in pressing for a solution on these lines.

How Germany's Fair Contribution to Defence might be obtained

24. The key to this problem is therefore clearly political. To what extent can we rely on German willingness to make a contribution of the necessary order, how far will the Americans and the French support us, and what means of pressure are available? There can be no doubt that the German Government is in fact anxious to make a military contribution, as it is extremely conscious of the very considerable political advantages which will accrue as a result. But to date they have with some skill contrived to be courted rather than themselves courting this development, and will undoubtedly argue that they should be wholly released from the maintenance costs of Allied troops. It is on the means of pressure that we must therefore rely, and to be effective this must be exerted in concert by the occupying Powers. There is some hope that both our partners will be of similar mind to ourselves. The American military authorities at least will be most anxious not to swell their bill to Congress by the cost of maintenance of United States troops in Germany, and in their draft of the contractual arrangements have stated that the Federal Budget should bear the cost of the defence contribution and the support of Allied Forces in Germany, in that order of priority. The French apparently hope that Occupation costs will continue to be paid under existing arrangements and not placed on a contractual basis.

25. Initially therefore the interests of the three Powers would seem identical, but motives differ. The prime American concern is for a German military contribution to be made as soon as possible, the French for completion of political agreement on a European Army, for which no real financial plans have been laid, while we, though fully alive to defence considerations, must necessarily have the economic effects particularly in mind. Nor are the means of pressure equally shared. In the last analysis our only weapon would be to threaten drastic reduction of our troops, which as the Germans would be well aware, would involve such impossible political and strategic consequences that the threat itself would be ineffective. The French would no doubt reconcile themselves to Occupation costs if they were able to obtain some form of United States aid for themselves to compensate for any increased financial burden on France. Only the Americans have an argument to which the Germans will always be sensitive—the threat of withdrawal of aid. Unless the United States is prepared in the last resort to use this threat to obtain German agreement to an adequate total contribution we can have little hope of a solution tolerable to ourselves.

Commercial implications for the United Kingdom

26. There is a further point which must be borne in mind, although it is of a long-term nature. Having regard to existing limitations on the German rearmament industry, their engineering industry will be relatively free of the heavy burden which rearmament imposes on our own, and their competitive position overseas will consequently be strengthened, which may in turn improve their external position—possibly at our expense. From this point of view and disregarding security considerations there would be advantage if some of the limitations approved by N.A.T.O. on the German heavy armament industry were raised and they were themselves required to manufacture a large part of the heavy equipment which they will require. This, however, would reduce their need for United States end item aid and increase the burden on their own budget, consequently still further reducing the amount which we could hope to obtain by way of support for the Allied Forces. We are here in a dilemma. The greater the United States supplies of arms and aircraft to Germany, the more risk that our own military supplies from the United States needed to complete the equipment of our own forces may be curtailed. But if the Germans manufacture their own arms, not only is their ability to contribute to Allied deutschmark costs reduced, but they cease to be so dependent on the Allied Powers for the means of defence, and may therefore feel able to assert an undesirable independent line. On balance, we conclude that our immediate economic interests, on budgetary and balance of payments grounds, combine with the political factors to require acceptance of the added risks to our overseas markets and the supply of equipment from the United States, implicit in limiting German arms production.

Conclusions

27.—(i) A German military contribution to N.A.T.O. or to a European army raises in acute form the future financing of the cost of maintaining Allied forces in Germany.

(ii) The amount of financial support for our troops in Germany which we shall be able in future to extract from the Germans will depend in the last resort on the willingness of the Germans to provide it and on the timing and cost of their own military force.

(iii) On the assumptions which we have made regarding cost and timing, it should be possible on economic grounds for Germany to meet essential Allied deutschmark expenditure while financing the cost to Germany of the German military force, and in doing so she would probably not be paying more than her fair share for Western Defence.

(iv) These assumptions may, however, prove over-optimistic and it will be particularly difficult to induce the Germans to make a fair defence effort when the cost of the support of Allied forces represents a high proportion of the whole.

(v) Any reduction in the amount of our share of Occupation costs paid by Germany threatens an additional burden on the United Kingdom Budget and our external balance of payments. If we had as a result to shoulder the whole present deutschmark cost of our forces in Germany, the increased budgetary cost would be of the order of £150 to £180 million a year, with a burden on our balance of payments of a similar order.

(vi) It must be our objective to ensure if possible that our essential deutschmark expenditure in Germany is covered by the German contribution, but this is likely to prove very difficult in any event, and particularly if the rate of build-up of a German military force is quicker, its cost higher or American aid less than assumed. (vii) Economics in the United Kingdom expenditure in Germany or some compensating payments of other kinds, e.g., debt settlements would, to the extent they can be realised, mitigate the effect on the United Kingdom Budget and balance of payments.

(viii) Substantial economies could only be made in Germany by a major change of policy in the employment of German labour, which would involve complete reorganisation of the British forces, changes in the distribution of existing manpower and forces as between the three services, and a reduction in the number of fighting units either in Germany or elsewhere. Even these economies could only cover a small part of our deutschmark expenditure.

(ix) Significant relief could be obtained if it proved possible to negotiate agreement both with our Allies and the Germans for full repayment within a few years of Germany's post-war external indebtedness and her matured pre-war sterling debts.

(x) If it should not be possible to secure that our essential deutschmark expenditure is met, the additional burden on our defence programme will necessitate important decisions as regards either the scale of our defence programme or the nature of the economies necessary to keep it within the existing ceiling and at the same time avoid serious prejudice to our balance of payments.

Recommendations

28.—(i) We should seek an early opportunity, in the context of our own economic problems, of impressing upon the United States Administration, the consequences which are liable to result for the Allies from the creation of a German military force. At these discussions in which the French should participate, we should maintain that we cannot accept any additional charge either to our Budget or on our balance of payments. We must accordingly explore with the United States and French Governments means (as indicated in paragraphs (ii)—(v) below) of avoiding this additional charge without prejudice to the common defence effort.

(ii) We should urge that, without prejudice to our own defence programme and that of other N.A.T.O. Powers, the largest possible quantity of heavy armaments and notably military and naval aircraft, which the Germans cannot in any event hope to manufacture for themselves in the early stages, should be provided free by the United States as end-item aid.

(iii) We should seek an understanding from the Americans to make further help to Germany dependent if necessary on satisfactory arrangements for the provision by the Federal German Government of support for Allied forces in Germany which we believe to be fully within their economic capacity.

(iv) We should endeavour to secure tripartite agreement on making the most critical scrutiny of the German figures for equipment and capital expenditure on defence.

(v) We should establish with the Americans that there is a close relationship between any beneficial effects on the German balance of payments of a German military contribution and Germany's capacity to pay foreign debts, but should not pursue any specific proposals in the debt context until the prospect of obtaining from the Germans a fair contribution to the cost of Allied forces in Germany has been assessed.

(vi) At the same time, we should instruct the United Kingdom High Commissioner—

(a) to prepare plans, in conjunction with his United States and French colleagues for all possible reductions of Allied use of capital installations in Germany in order to lower initial German outlay on capital equipment;

(b) to continue to impress upon the Federal Government the need for increased taxation to meet a situation in which a heavier burden than the existing level of Occupation costs will be placed upon the Federal Exchequer;

(c) to explore in the High Commission and at an appropriate time with the Federal Government the possibility of meeting some part of the non-recurrent expenditure by an internal loan.

(vii) Efforts to reduce our own DM. costs in Germany should be intensified, in the knowledge that, unless means other than transfers of sterling can be found of meeting our DM. needs, drastic economies may become necessary.

Cabinet Office, London, S.W.1, 24th August, 1951. WASHINGTON AND OTTAWA MEETINGS: REVIEW OF BRITISH POLICY

MEMORANDUM BY THE PRIME MINISTER

As the Cabinet is aware the Secretary of State for Foreign Affairs proposes, after attending the San Francisco Conference on the Japanese Peace Treaty, to visit Washington for talks preparatory to the North Atlantic Council first with Mr. Acheson and then with Mr. Acheson and M. Schuman together. These talks can only last a few days and the Foreign Secretary will then proceed to Ottawa, where the Chancellor of the Exchequer and the Minister of Defence will join him in representing the United Kingdom at the North Atlantic Council meeting. The agenda for the talks with Mr. Acheson and for the tripartite talks with Mr. Acheson and M. Schuman in Washington and the latest text of the agenda for the Ottawa Conference are attached as annexes to this Paper.

2. Except in the matter of policy towards Germany, on which I am circulating separate memoranda, it is not likely that the Foreign Secretary will be called upon at these meetings to take decisions such as would require new instructions from the Cabinet at the present moment. Generally speaking, the line which he will follow is covered by existing agreed policy and, where this is not so (as, for example, in the matter of new American initiatives in regard to "closing the gap" and in regard to a European defence force), either the position is so fluid that no concrete Cabinet instructions are possible or the discussions are to be exploratory only and not intended to result in decisions. I think, however, that the Cabinet will wish to have this survey of the main issues likely to arise in the forthcoming series of discussions and of the line which the Foreign Secretary will pursue. I am grouping the subjects under broad headings and not necessarily following the order in the various agenda which in any case differ and to some extent overlap.

3. It is, of course, possible that Soviet action at the San Francisco Conference will be such as to upset the time-table for the Washington talks and even for the Atlantic Council; and it cannot be altogether excluded that developments in San Francisco might cause some interference in the broad policies which the Western Powers have in mind to pursue at this series of meetings. This cannot be foreseen, however, and the following paragraphs are based on the assumption that the Washington and Ottawa meetings will proceed as planned and that the Western Powers will continue to follow the general course of policy which they have followed up to the present.

I.—Political Questions

4. The primary object of the talks with Mr. Acheson will be for the two Ministers to assure themselves that United States and British policy are substantially in line on major issues; and where there are divergencies to reconcile these if possible or find a means of minimising their effect. The same applies generally to the tripartite talks also, for, although we do not admit the principle of Anglo- United States-French direction in global strategy (as opposed to purely Atlantic strategy), we must carry the French in most of the major political issues with which we are confronted.

5. The second purpose will be to prepare the ground for the North Atlantic Council and to form some common idea as to the results which are to be expected from it. The three Ministers will also no doubt examine and agree upon the broad programme of discussion and action for the coming months, leading up to a second meeting of the North Atlantic Council in Rome later in the Autumn.

6. The main political headings are the policy of containment of the Soviet Union and its satellites, the future of European integration and the Atlantic community, policy in the Middle East and policy in the Far East. Subsidiary issues are the Italian Peace Treaty, Austria, Spain and the problem of protecting nationals in Eastern Europe.

Survey of Progress in the policy of containment of the Soviet Union and its satellites

07. This item is placed first on the tripartite agenda in order that the three Ministers may begin their meeting with a general survey of the progress made by the West in containing Communism since their last meeting nearly a year ago and with a discussion of future policy and action.

08. Broadly speaking, I think the Foreign Secretary would be right in saying that His Majesty's Government consider events to have justified the policy adopted by the West in this period. The policy of building up positions of strength and of offering firm resistance to any threat of aggression has been successful and the Soviet Union have suffered a series of set-backs. Apart from the successful armed resistance in Korea, we have provided the necessary deterrents to any move forward in Germany, Austria or Southern Europe and we have established without let or hindrance an Allied Supreme Command in Europe with additional American and British forces on the ground. We have instituted very substantial measures of rearmament designed to maintain the deterrent effect of the Atlantic alliance and we have refused to allow ourselves to be divided or turned from our purpose by Soviet propaganda or by the Peace Campaign or by the perils of the four-Power talks. These experiences suggest that we should continue to resist encroachments and to build up our strength, but without provocation and that above all we must remain united.

09. As our confidence and our strength revive, however, two concurrent dangers will have to be watched. The first is the risk that we might overlook or misjudge the reaction of the Soviet Union to some element in our policy which touches a sore spot in their security or around their perimeter. Unless the Western Powers make careful assessments of these risks and agree upon them there will always be a danger that the Soviet Union might be provoked to preventive war or at least to move over to a war economy, while the Western defence preparations are still at an elementary stage. This danger applies particularly to American policy in the Far East, but there are other matters, such as the establishment of air bases near the Soviet borders, which might be equally dangerous. There is, indeed, a risk that, owing to impulsiveness or under the pressure of excitable public opinion, United States policy might go to unreasonable lengths. The Foreign Secretary should utter a word of warning if and when appropriate against such tendencies.

10. The second danger is that we might overlook the need for the Western Powers to be constructive and positive in their relations with the Soviet Union. If, for example, they do not show willingness to negotiate, they are likely to alienate important sections of Western opinion. This is not to say that the moment is ripe for the Western Powers to proclaim their willingness to enter into full-scale negotiations with the Soviet Union with a view to a general settlement.

11. Finally, it may be advisable for the Foreign Secretary to point out, as a prelude to the discussions which he and the Chancellor of the Exchequer will be having at a later stage on the burden of defence, that the need to sustain morale and to maintain a reasonable standard of living amongst the peoples of the West is just as important as the need to increase defences. Too much pressure to increase defensive expenditure of nations which lack resources of economic wealth may be very dangerous, and may result in opening the way to Soviet penetration and thus defeating the very object of containment. European Problems and the United Kingdom Attitude towards European Integration

12. This item is placed on the bilateral agenda in order to give the Foreign Secretary an opportunity to explain to Mr. Acheson British policy towards the European integration movement. This can be summed up as follows. We are willing to play an active part in all forms of European co-operation on an intergovernmental basis but cannot surrender our freedom of decision and action to any supra-national authority. We are quite ready to encourage Continental countries who feel disposed to adopt such plans and in the case of the Schuman Plan have declared our wish to be closely associated with any Authority that may be set up under it. We are considering the possibility of making a more definite statement in this sense in the near future. We are also ready to look very sympathetically on the European Army Plan provided it can be shown to be militarily effective. We are anxious to develop the consultative role of the Council of Europe which is the focal point of the European integration movement, and the proposal that the Chancellor of the Exchequer should introduce to the Consultative Assembly the Annual Report of the O.E.E.C. can be quoted as an example of our desire to encourage the Assembly to discuss serious matters.

13. Broadly speaking, however, it is our aim to foster the idea of an Atlantic rather than a purely European community, although we believe that closer continental integration on a supra-national basis is not necessarily inconsistent with our conception of the larger entity. The Foreign Secretary might emphasise the point that the independent position of the United Kingdom enables us in cooperation with America to play a very special and important role in the free world; that closer dependence on the Continent would impair that position; and that it is thus in the interests both of the United States and of the other Western countries that we should maintain our independent position.

14. Later, at the Ottawa Conference, there will be a discussion of means for developing the Atlantic concept and the non-defence aspects of co-operation within N.A.T.O. and it is understood that Mr. Acheson will make proposals under this heading. The Foreign Secretary will be generally sympathetic towards the idea of developing co-operation between the United States, Canada and Western Europe on the Atlantic basis and will be favourable towards any reasonable proposals for strengthening the machinery of N.A.T.O. for these purposes. It is clearly in conformity with our policy not to allow the North Atlantic Treaty to become simply a defence organisation designed to meet the present threat from the Soviet Union, but to keep alive the longer-term objective of an Atlantic community.

Alignment of United States–United Kingdom Policies in the Middle East

15. Egypt.—We have reached a critical stage in our relations with Egypt. The Egyptian Government is threatening to abrogate at an early date the Anglo-Egyptian Treaty of 1936, on which we base our right to station forces in the canal zone. If they do so, we shall of course stand on our rights under the treaty. According to present estimates, we shall be able to maintain our position in the canal zone, although with difficulty.

16. It would of course be far preferable that we should have reached agreement with the Egyptians. We believe that our best, perhaps our only chance of reaching such an agreement is to make a new offer to the Egyptians, based on Egyptian participation in the new Allied Middle East Command. Such an offer would not, of course, dispose of the Egyptian refusal to contemplate any solution of the defence question unless we first satisfied their demands over the Sudan. There is, however, some hope that if the Americans support us in an offer to the Egyptians of participation in the new Allied Middle East Command, they may agree to discuss the offer, leaving the question of the Sudan for the moment in abeyance.

17. The Americans can help us by associating themselves with our offer, and, if the offer fails by supporting us in the stand we shall have to take. The Foreign Secretary will therefore make it his object to secure:—

(a) American agreement on what we regard as our essential minimum requirements in Egypt for the defence of the Middle East; (b) full support in our attempts to secure them, and an undertaking that the Americans will make it clear to the Egyptians at an early stage that their support will be forthcoming;

(c) an undertaking to co-operate with us in an attempt to bring Egypt into the proposed new Middle East Command, as a possible means of solving the present deadlock to our defence negotiations; and

(d) an undertaking to stand by us if negotiations break down, leading perhaps to serious trouble in the Canal zone or to an argument in the Security Council.

18. General.—The problems of the Middle East vitally affect American interests as well as our own, and we readily admit that we cannot tackle them alone. Such questions as Arab refugees, economic development and, above all, defence, need co-ordinated planning.

The Foreign Secretary will therefore suggest to Mr. Acheson that we should reaffirm the principle that, in all matters where our common interests are involved, we should always consult each other at an early stage in the formation of policy.

19. Kashmir.—At the end of September Dr. Graham, the United Nations Mediator, is due to report to the Security Council. We expect him to report failure to effect the demilitarisation of Kashmir. At about the same time the Constituent Assembly of Indian-occupied Kashmir will be convened. Both events will increase tension, and are likely to lead to heavy Pakistan pressure for action in the United Nations against India. We are anxious to avoid anything in the nature of a Resolution which merely condemns India and leads to stalemate in the Security Council. We therefore hope to get the case referred to the Assembly if, as seems likely, it cannot be settled in the Security Council. As this subject was placed on the agenda at the request of Mr. Acheson, the initiative lies with him. But the Foreign Secretary will take the opportunity to make our views known to him, and will seek his support for the proposal to refer the dispute to the Assembly.

Alignment of United States-United Kingdom Policies in the Far East

20. Korea.—The Foreign Secretary will wish to obtain assurances from Mr. Acheson on the following lines:

(a) That the policy of the United States Government is neither to withdraw prematurely nor to extend the war, and that they will continue to keep the South Korean Government firmly under control to prevent them frustrating United Nations policy.

(b) That the United States and United Kingdom Governments shall consult together on further references to the United Nations regarding Korea. We consider that if an armistice is secured the matter should go at a suitable stage initially to the Security Council and then be referred to the Assembly. In the event of no armistice it will be difficult to avoid a general debate in the Assembly in the form of an inquest.

(c) If full-scale fighting breaks out again in Korea, we would still hope that the United States Government would agree with us that the campaign should be confined to Korea and that a general offensive up to the Manchuria border should not be attempted. We should stand more or less on present lines, inflicting maximum loss on the enemy. Should, however, any Chinese offensive against the Kansas line be repulsed with heavy losses and general disorganisation, General Ridgway should have discretion to undertake tactical advances as is thought militarily desirable to follow up the retreating Chinese. Should he wish to make a major advance—such as to advance as far as the “Northern Waist”—this would require the approval of Governments. If the new enemy offensive included large-scale air raids from points outside Korea, we would support a policy of retaliation. In that case we and the United States would have to reckon with the probability of general war with China, possibly extending to war with Russia.

(d) If all goes well in Korea and the way seems open to a gradual general improvement in the Far East situation, we hope that it will not be blocked by a rigid United States attitude towards the Chinese People’s Government. If an armistice is arranged, we trust that the United States Government will agree in principle to sit round a table with representatives of Peking for the next round of talks which, in the first instances, should be confined to Korea. A meeting of representatives of some of the countries contributing aid to the United Nations in Korea, together with the Russians, Chinese and possibly the North and South Koreans, might be a suitable forum. The ground for this meeting could be prepared by a specially appointed United Nations representative. If, in the view of the majority of the United Nations, a change-over in Chinese representation in the United Nations will contribute to a Far Eastern settlement we hope that the United States Government will accept the majority view. If we succeed in reaching a settlement in Korea we hope to pass on to wider discussions for a general settlement in the Far East. We do not, however, overlook the fact that even if an armistice is arranged we may have to face a prolonged political stalemate on the basis of a divided Korea.

China, including representation in the United Nations

21. General Policy.—Whilst the United Kingdom and United States Governments are both building up strength and will resist Chinese interference in the affairs of others, our joint aim should be stability and peace by avoiding interference in Chinese internal affairs, by keeping open the small windows to the West that are still in existence, and by consultation with like-minded Governments including Asian Governments, and by the gradual relaxation of tension.

22. Formosa.—The Foreign Secretary will seek an assurance from Mr. Acheson that the assistance which the United States Government are giving to Chiang Kai-shek is solely for the purpose of the defence of Formosa and will not be misused for adventures elsewhere, including Burma. A policy of pin-pricking the Chinese is futile and dangerous.

23. Chinese Representation in the United Nations.—Unless there is some major change in the situation (e.g., an extension of the Korean war), we should continue our present flexible policy of voting to postpone the question of Peking's admission into United Nations organs (i.e., the moratorium). If, however, an armistice is secured in Korea, the absence of Peking from the United Nations may be a major stumbling-block in the subsequent political discussions. It is too early to decide whether it will be wiser to press for a change-over in Chinese representation in the United Nations before general political discussions, but the United States Government should be made aware that in our view Peking's representation in the United Nations will be an essential condition for a general settlement though we have at present an open mind on whether this change-over should take effect before or after political discussions. It might, for example, be left until after general agreement on the terms of a settlement in Korea and be conditional on such general agreement.

24. Indo-China.—The Foreign Secretary will enlist the support of M. Schuman for the line he proposes to take with Mr. Acheson in the bilateral talks. M. Schuman is likely to refer to Indo-China. He may suggest an Anglo-United States guarantee of the frontiers of Indo-China; this is impracticable. He may ask for military support in the event of Chinese intervention in Indo-China. The Foreign Secretary would in these circumstances assure M. Schuman that we are wholeheartedly behind the French in Indo-China and would do our best to help them, subject to our own commitments at the time and to similar action being taken by the United States. He would then propose that a meeting of the United Kingdom—United States—French Chiefs of Staff should be held to formulate a tripartite military policy for South-East Asia and make recommendations to the three Governments.

Italian Treaty revision, including Trieste

25. The United States and French Governments agree with our view that the Italians have a strong case on military, political and equitable grounds for revision of their Peace Treaty. There are, however, serious difficulties (e.g., the Yugoslav attitude and the fact that Russia is a party to the Treaty) and we consider that the matter must be approached with caution. The first stage in our view—and the only one which for the moment we consider practicable—should be a tripartite declaration by the United States, United Kingdom and French Governments of their intention to seek a revision of the military and economic clauses of the Treaty. Formal action would require reference to all signatories, and would have to wait until the situation was easier. The French have accepted this position in principle. The American view is not yet known, but they are likely to minimise the difficulties and to favour immediate action for formal revision.

26. The United States Government and His Majesty's Government have agreed to urge the Italian and Yugoslav Governments to negotiate on Trieste as soon as possible, and it might greatly assist the Italian Government in presenting any settlement to their public if we could arrange simultaneous action on the Peace Treaty. Our first objective at Washington will, therefore, be to prevent hasty action on treaty revision before the various difficulties and notably the question of Trieste have been disposed of. This may not be easy. The United States Government have invited Signor De Gasperi to Washington immediately after the Ottawa Conference and will not want to send him away empty-handed, and the French are, on general political grounds, anxious to help Italy over Treaty Revision.

Austria

27. This subject was suggested by Mr. Acheson. It is likely that he will wish to discuss the two questions of Treaty Tactics and Occupation Costs.

28. Treaty Tactics.—The Austrian Foreign Minister has suggested that it would be desirable to hold a meeting of the Deputies on the Austrian Treaty early this autumn, in order to reassure Austrian public opinion. The Russian attitude on this subject has for some time been uncompromisingly negative and shows no sign of changing. Moreover, when the Deputies last met, progress was held up over the question of Trieste. At present we are trying to persuade the Italians and Yugoslavs to reach an early settlement of this question. If we succeed we shall be in a much better position to reopen the Treaty talks.

29. The Foreign Secretary intends therefore to take the line that no meeting of the Deputies should be held in the near future, though, if necessary, a statement reaffirming the attitude of the Allies over Austria might be issued after the meeting with the object of heartening Austrian public opinion.

30. Occupation Costs.—We have been pressed by the United States Government to pay our own occupation costs in Austria. We have so far refused, mainly on the ground that the occupation costs at their present level represent a very modest contribution by Austria to her own defence and that of Western Europe. It is not suggested that we should change our attitude.

Spain

31. When the United States Government decided to enter into military discussions with Spain, Mr. Acheson assured Sir Oliver Franks that the question of Spain's association with N.A.T.O. would not be raised, and that General Franco was only to be invited to discuss such matters as the provision of airfields for staging aircraft through Spain. So far, the United States Government appear to have kept fairly strictly within these limitations, but General Franco has already asked for military aid for the Spanish Armed Forces and there is no doubt that he will press this demand in subsequent phases of the negotiations. He is also certain to drive a hard bargain over economic aid. Strong pressure will no doubt be exerted on the State Department, not only by the Spanish Government, but also by the pro-Spanish lobby in Congress and by the military authorities.

32. In these circumstances the Foreign Secretary proposes to emphasize that His Majesty's Government remain firm in their opinion that any arrangement involving American military aid to Spain would have most unfortunate results. It is to be hoped that this will help to reinforce Mr. Acheson's position.

33. If General Franco insists as his quid pro quo upon the provision of military aid, the Americans may propose to raise the problem of military aid for Spain in N.A.T.O. The Foreign Secretary would strongly oppose this suggestion, which could only lead to an open disagreement between the Americans and ourselves in N.A.T.O. The French would be likely to support our point of view strongly, though there is less certainty in the case of certain other N.A.T.O. members, notably Italy. The Protection of nationals in Eastern Europe

34. Mr. Acheson put this question on the agenda, probably as a result of the recent imprisonment of Mr. Oatis, an American citizen, in Czechoslovakia and of their experience in connexion with the imprisonment and release of another American, Mr. Vogeler, by the Hungarian Government. He is likely to suggest that we should agree on a common policy to prevent further cases of this kind.

35. The Foreign Secretary will suggest that it would be very difficult to work out any rule of thumb for dealing with such cases, and that each case should be considered on its merits. He will assure Mr. Acheson that we are not prepared to accept terms for the release of Mr. Sanders (a British subject at present in prison in Hungary) which might prejudice the security of the Western Powers. On the point of principle, he will emphasise that, while it may be possible in particular cases to bargain with the satellite Governments for the release of individuals, His Majesty's Government consider it dangerous to accept the principle of "ransoming" such persons, because it would merely encourage the satellites to persecute foreigners.

II.—Defence Questions

36. The most important of the Defence Questions to be considered at the tripartite meetings is "the European Defence Force and the problem of an early German contribution with particular reference to procedure and methods." This is dealt with in separate Cabinet papers, and I need only say here that the discussions in Washington on this topic are intended to lead up, not to the Ottawa meeting of the Council (where it is unlikely that the subject will be touched on except in the most general terms), but to the later meeting of the Council in Rome. The other main headings under defence are Atlantic and Mediterranean Commands and the question of Greek and Turkish accession to N.A.T.O., with which is connected the question of the Middle East Command.

Atlantic and Mediterranean Commands

37. The Americans may press for finalization of the Command arrangements for the North Atlantic Ocean. Earlier in the year there was, as the Cabinet know, general agreement within N.A.T.O. to the appointment of Admiral Fechteler as Supreme Allied Commander, North Atlantic Ocean, but after the public criticism of this appointment in Parliament the Americans announced that they were not ready formally to approve the arrangements.

38. We ourselves have been taking the line that the final announcement of this appointment should not be made until the establishment of an equivalent Command under a British Supreme Commander either in the Mediterranean or in the Middle East could be announced. The agreement now reached in the Standing Group is that there shall be a Supreme Command, Middle East, under a British Supreme Commander but that there shall be no Supreme Command in the Mediterranean. Admiral McCormick, who has succeeded Admiral Fechteler as Commander-in-Chief of the United States Atlantic Fleet, is expected to be nominated as Allied Commander Atlantic Ocean and the Foreign Secretary proposes to agree to the announcement of his appointment provided that at the same time the willingness of the three Standing Group powers to take part in a Supreme Command in the Middle East under a British Supreme Commander is announced.

39. In the Mediterranean it is proposed that there shall be two Naval Commanders-in-Chief, the American Admiral commanding United States naval forces and being primarily responsible for supporting General Eisenhower's right flank; and the British Commander-in-Chief, Mediterranean, commanding all British naval forces and naval bases in the Mediterranean, with primary responsibility for supporting the Supreme Allied Commander in the Middle East. There will naturally be very close co-operation between the two Allied commanders, who will work out together the division of their responsibilities throughout the Mediterranean. It is likely that there will be a subordinate French command in the Western Mediterranean. Greece and Turkey and the North Atlantic Treaty Organization

40. One matter on which it is hoped to reach positive decisions at the Ottawa Conference is the admission of Turkey and Greece to the North Atlantic Treaty. As my colleagues are already aware, His Majesty's Government have committed themselves publicly to support the admission of these two countries and assurances to this effect have been given to the Turkish and Greek Governments. In the case of Turkey, we have made it plain that we should expect her, once she is admitted to the Treaty, to play a full part in the defence arrangements for the Middle East. We have received repeated assurances from the Turks that they are prepared to do this once they have been admitted to N.A.T.O.

41. This decision was reached by us reluctantly because we were satisfied that the United States Congress could not be persuaded to offer guarantees to Turkey and Greece in any other form. The French Government, with even more reluctance, now appear to have reached the same decision. But a number of the lesser members of N.A.T.O. are still unconvinced of this and are advocating the conclusion of a Mediterranean or Middle East Pact as an alternative method of securing the co-operation of Turkey and Greece in Western defence. The Report of the Deputies, which will be under discussion at Ottawa, brings out these conflicting opinions.

42. The first part of the task at Ottawa will be to convince these governments that there is no prospect of any alternative of this kind being accepted and that admission to N.A.T.O. is the only solution. The objections likely to be expressed fall under two main heads. First, that the arrangement extends unduly the area of responsibility of member countries (such as the Scandinavians and Benelux) who have no special interest in the Middle East; and second, that the admission of Turkey and Greece into the N.A.T.O. family will destroy the "Atlantic concept" on which the treaty is based. It may be possible to allay to some extent the first of these fears by means of the Command arrangements which are being worked out in the Standing Group, whereby the defence of the Middle East area, including Turkey, would be regarded as primarily the responsibility of a Middle East Command not fully answerable to N.A.T.O. as a whole. As for the second, it may be that the proposals which Mr. Acheson intends to put forward for strengthening the Atlantic concept and fortifying the non-defence aspects of the Treaty will meet these objections to some extent.

43. Assuming, however, that the basic opposition of certain members to the admission of Turkey and Greece can be overcome the second part of the Foreign Secretary's task will be to safeguard our thesis that Turkey must be primarily associated for defence purposes with the Middle East Command under a British Supreme Commander. Despite the agreement in the Standing Group on the main principles of such a Command, and of Turkey's participation in it, we are by no means certain that the Americans genuinely support the arrangement and there is a lot of evidence which suggests that they would prefer to bring Turkey under General Eisenhower's Command. They have persistently expressed the view that no prior conditions must be attached to Turkey's admission and have been reluctant to agree that command questions should be discussed at all at the Ottawa meeting. Our own idea had been that the N.A.T.O. Powers might agree in principle at Ottawa to the admission of Turkey and Greece, and that discussions might then have taken place with these two countries as to how they would fit in to the Command Organisation, on the understanding that Turkey has undertaken to play her full part in the Middle East. The formal invitation might then have followed at the Rome meeting of the Council. Unfortunately we have now been informed officially by the Turks that they will not take part in conversations about the proposed Middle East Command Organisation until they can do so as parties to the North Atlantic Treaty. We shall therefore be obliged to modify our programme. If we leave the discussions with the Turks until after the Rome meeting of the Council it may be too late to utilise the establishment of the Command as a possible solution of our dispute with Egypt, which is one of its main advantages to us. We must therefore find some means of giving the Turks sufficient satisfaction at Ottawa to induce them to enter into discussions with us at once, and this may mean agreeing to an invitation to them to join N.A.T.O. without any assurance, other than those which they have given orally but categorically to us, that they will in fact join in the Middle East Command. This is a risk which we may have to take, placing reliance on the word of our Turkish allies. III.—Economic Questions

East-West Trade

44. The only fixed item of an economic nature on the agenda of the bilateral talks is the question of East-West trade on which the Foreign Secretary will take the opportunity to re-state the importance which we attach to the supplies which we obtain from Eastern Europe. He will take the opportunity of explaining once more our objections to the use of United States assistance to dictate the trade policy of other N.A.T.O. countries, a procedure which is endorsed in draft legislation at present before Congress, and will wish to make it clear that in deciding our own policy we shall not be influenced by the provisions of any United States legislation, although we shall continue to co-operate with the United States Government and other friendly Governments on East-West trade policy.

United States Attitude towards the Economic Aspects of the Defence Programmes

45. In Ottawa there will be an opening clash of opinion with the United States Government about the economic implication of the N.A.T.O. defence programmes. Though the responsibility for presenting the point of view of His Majesty's Government in this part of the discussion in Ottawa will fall primarily on the Chancellor of the Exchequer and Minister of Defence the issues at stake will be fundamentally political and the Foreign Secretary will wish to share the responsibility with his colleagues. Moreover, both he and the Chancellor may find it desirable to explore the political and economic aspects of the subject with the Administration in Washington in advance of the meeting in Ottawa. The United States authorities, including in particular the United States Deputy, have openly declared what the main objective of the United States Government will be at the meetings in Ottawa and Rome. To quote from a statement circulated by the Deputy they think that “it would be appropriate for decisive action to be taken at the October meeting aimed at meeting the total requirements of the Medium Term Defence Plan,” i.e., the plan whose fulfilment the military Standing Group of the N.A.T.O. have declared to be essential if the North Atlantic area is to be made militarily secure by 1954. There is in fact a large gap between the requirements of this plan and the total contributions which the N.A.T.O. Powers have severally undertaken to provide and the purpose of the United States representatives in Ottawa will be to persuade the representatives of other Governments that it is not only necessary but within the capacity of the various countries concerned to close this gap by 1954. The United States Government do not appear to contemplate any increase in their own defence programme for the next three years and the amount of military aid to other countries which they are thinking of asking Congress to note in 1953 is no more than they have recommended for the present year. They are in fact looking to the other N.A.T.O. countries to make the principal contribution towards closing the gap and there is a hint in the Deputy's statement that they may even suggest that the amount of military help which these countries will receive from the United States will depend on the degree to which they are able to satisfy the American view of what may properly be expected of them by way of an increased effort. 95 per cent. of the total defence effort of N.A.T.O. is, however, at present borne by the United States, United Kingdom and France and it is an illusion to suppose that the contribution which the smaller countries could make towards closing the gap could be very large in any circumstances. It is also implied in the Deputy's statement that if the first United States objective is achieved, namely, the implementation of the Medium Term Plan by 1954, the United States Government expect Europe thereafter to be able very quickly to dispense with any form of “end-item” aid and possibly of economic aid from the United States and would themselves then make a considerable reduction in their own defence expenditure.

46. There is every reason to suppose that most of the other N.A.T.O. Governments will be strongly opposed to ideas of this character and that their main endeavour at Ottawa will be to show that their defence efforts are already as large as economic and political circumstances allow. The Foreign Secretary and his colleagues, though they may agree that some of the smaller countries such as Belgium are being rather laggard, will wish wholeheartedly to associate themselves in characterising the American approach as ill-timed and ill-conceived. In the first place they will wish to point out that it takes no account of the work upon which the economic organs of N.A.T.O. have been engaged for the past few months and which is based on the fundamental concept that the burdens of defence must be equitably shared. The report of the Financial and Economic Board of N.A.T.O. will be likely to support our view that the programme to which the United Kingdom is now committed may already be more than its fair share, that the United States programme, including foreign aid, massive though it is, may not be more than their fair share, and that France's programme, on paper at any rate, may at least be equal to its fair share. Secondly, the American approach overlooks the fact that there is anyway a gap between the equipment which will be produced under the present defence programmes of the N.A.T.O. countries and the equipment which would be necessary properly to fit out the forces which they have agreed to supply. Although the United Kingdom is undertaking a defence programme which His Majesty's Government consider to be the maximum possible in present circumstances, we shall none the less not be able out of our own resources to equip the forces which we intend to raise ourselves or have an obligation to equip and we are counting on supplies of equipment from the United States to fill or at least narrow this gap. Full equipment for the forces we intend to raise by 1954 would cost about £4,000 million so far as we have been able to calculate and we are only planning to produce ourselves from £2,000 million pounds' worth so that even allowing for stocks in hand the gap will be very large. For the current year, however, the indications are that we shall get only a very small amount of equipment from the United States. Before agreement is reached to try to fulfil the full Medium-Term Defence Plan the forces which the N.A.T.O. countries have already undertaken to raise ought first to be properly equipped. In short, more United States aid is needed before existing programmes can be effectively executed let alone any expanded programmes. Finally, it would neither be equitable nor practicable for the N.A.T.O. countries other than the United States to maintain their forces out of their own resources after 1954 while the United States Government made a drastic reduction in their own expenditure on defence. Any attempt to arrange matters in this way would moreover result in such an increase in the disparity between American economic strength and that of Europe as would have a most disruptive effect on the alliance as a whole.

IV.—Conclusions

47. The United Kingdom and France could only undertake larger defence programmes than those to which they are publicly committed if they were to go on to a basis of a full war economy. Apart from the economic and internal political consequences of such a policy as this the result might well be to make the Russians follow suit and so precipitate the war which it is the purpose of the N.A.T.O. to prevent. It would in fact only be justified if, for other reasons, it appeared likely that war was imminent. The Foreign Secretary will have to make this plain to the Americans and he will, of course, have the strong support of M. Schuman. The conclusion which he will wish to have drawn is that short of an imminent threat of war there are only two ways of closing the gap between existing programmes and the Medium-Term Defence Plan, namely, a large increase in the American effort or a downward reassessment of the requirements of the Plan itself. If General Eisenhower supports the new American approach by asking for more fully equipped divisions to be stationed in Europe than existing plans contemplate, the best way to meet his requirement would be for more American divisions now stationed in the United States to be put under his command. The Foreign Secretary will also wish to join his colleagues in making the general points mentioned in the preceding paragraph and so far as the United Kingdom in particular is concerned in laying special stress on the two points (a) that short of imminent war our present defence effort is the most that we can contribute, and (b) that in order to make it effective more American equipment will be needed than we appear on present form to be likely to receive.

C. R. A.

10 Downing Street, S.W. 1, 30th August, 1951. SECRET

CABINET

Please attach these Annexes to your copy of C.P. (51) 239.

Cabinet Office, S.W.1.,

31st August, 191. ANNEX I

AGENDA FOR UNITED STATES - UNITED KINGDOM DISCUSSIONS

1. European problems and the United Kingdom attitude towards European integration.

2. Alignment of United States - United Kingdom policies in Middle East: A. Egypt B. Persia C. Kashmir.

3. Alignment of United States - United Kingdom policies in the Far East: A. Korea - next steps (with or without Armistice) B. China, including representation in the United Nations. C. East - West trade. D. Economic questions.

ANNEX II

AGENDA FOR TRIPARTITE DISCUSSIONS

01. Survey of progress in the policy of containment of the Soviet Union and its satellites.

02. Atlantic and Mediterranean Commands.

03. Greece and Turkey and North Atlantic Treaty Organisation.

04. European Defence Force and problem of early German contribution with particular reference to procedure and methods.

05. Contractual arrangements with Germany.

06. Italian Treaty, revision including Trieste.

07. Austria.

08. Spain.

09. Problems of protecting nationals in Eastern Europe.

10. Far Eastern Questions. A. Korea - next steps (with or without armistice). B. Policy toward China, including representation in the United Nations. ANNEX III

DRAFT AGENDA FOR SEVENTH SESSION OF THE NORTH ATLANTIC COUNCIL

I. Opening address by the Chairman.

II. Adoption of agenda.

III. Exchange of views on the world situation.

IV. Discussion of activities of the North Atlantic Treaty Organisation, based on:

1. Report by the North Atlantic Council Deputies to the North Atlantic Council, to include: a) Report of the Chairman, Council Deputies b) Progress report from Council Deputies c) Progress report from Defence Production Board d) Progress report from Financial and Economic Board.

2. Statement by military representative.

V. Association of Greece and Turkey with Western defence.

VI. Report by each member country on the status of defence effort.

VII. North Atlantic defence plans - Proposals for co-ordinated action by NAT agencies, particularly in preparation for October meeting of Council.

VIII. Future development of NATO, other than in connection with defence plans.

IX. Other business.

X. Communique. CABINET

GERMANY

MEMORANDUM BY THE PRIME MINISTER

As my colleagues know, the question of a new relationship with the German Federal Republic is the most important item on the agenda for the Foreign Secretary's meeting with Mr. Acheson and M. Schuman in Washington next month. Much has already been done since 1948 towards a more normal relationship and we have now reached the stage of moving from an occupation régime to a contractual relationship, while preserving supreme authority in certain essential spheres. This is tied up with the question of a German defence contribution. The report of the High Commission (a summary of which is attached at Annex I), on the proposed new contractual arrangements, has been received and one of the main purposes of the Washington talks is to send new instructions to the three High Commissioners which will enable them to resolve existing differences between the three national elements in the High Commission, and to complete their negotiations with the Germans before the Foreign Secretary meets Mr. Acheson and M. Schuman again towards the end of October. All this flows from the decisions taken by the Foreign Ministers of the three Occupying Powers in Brussels last December, which the late Foreign Secretary reported to the Cabinet in paragraph 6 of C.P. (51) 74.

2. The Western Government and public opinion are of course well aware of the proposed change in the international status of Germany and they conceive, unfortunately with some justification, that the proclaimed Allied desire for a German military contribution places Germany for the first time since the war in a strong bargaining position. These and other recent developments have affected the climate of opinion in Germany. The revision of the Occupation Statute, the Prohibited and Limited Industries Agreement, the signature of the Schuman Plan, and the political and military discussions which have taken place with, as well as without, German participation, about Germany's own future, have given the German public the impression that the Allies are moving, though, in their view, too slowly and sometimes incoherently, towards the proclaimed goal of re-establishing Germany as a respectable and equal, or nearly equal, member of the Western family of nations. Germany's relations with the Occupying Powers have recently been under considerable strain over such issues as the export of coal (and in our own case scrap) and, above all, the financial burden of increased occupation costs. Considerable political capital has been made of this by opposition elements in Germany. There is an understandable impatience over any delay in the achievement of equal status, and unless this goal is achieved reasonably soon, there is a real danger that political extremists may undermine the moderate elements now dominating German political life.

3. Meanwhile, my colleagues will have seen Mr. Acheson's message and the replies sent by the Foreign Secretary and M. Schuman. The texts are attached as Annexes II, III and IV. It is clear from this correspondence that the Americans are set on a programme of study and discussion designed to lead up, before the end of this year, to fundamental decisions on the political relationship of the Occupying Powers in Germany. The first decisive stage in the programme is to be the meeting between Mr. Morrison, Mr. Acheson and M. Schuman in Washington in September, when Mr. Acheson urges that we should be prepared to reach tripartite agree- ment on this matter. The views expressed by M. Schuman are generally in line with our own. He also hopes for early decisions and brings out the close association between a German political settlement and a German defence contribution.

Thus the tempo of political evolution in Germany and the programme suggested by Mr. Acheson (although it will be seen that the Foreign Secretary and M. Schuman have warned him that they consider his programme a pretty tight one), make early decisions unavoidable, both in regard to the political status of Germany and to her participation in Western defence, which are of course closely inter-connected. The Allies cannot with safety postpone for much longer a final decision on these issues. If, by the end of the year, it appears that they are unwilling or unable to reach such a decision, a damaging collapse of public confidence in the West will take place in Germany. Either the three Occupying Powers must resolve to carry forward the policy of reconciliation and integration of Germany with the West, on which we have acted since 1948 in accordance with our numerous public commitments in that sense, and to conclude a settlement acceptable not only to the German Government (who will almost certainly need to make constitutional amendments which would require a two-thirds majority in the German Parliament) but also to the general body of German public opinion, or we must be prepared to face the danger of the eventual collapse of our German policy and the gradual passing of Germany out of the Western orbit and probably eventually into the Soviet camp. This view is strongly endorsed by the United Kingdom High Commissioner in Germany. On the second hypothesis, security considerations would demand a tightening rather than a relaxation of the occupation régime, with all that this implies in increased financial and man-power demands upon us, in addition to the dangerous tensions thus revived in Western Europe. Such a reversal of our policy seems to me an alternative which we cannot possibly contemplate.

5. The question of Germany's future political status is bound up with the question of defence. The firm and lasting association of Germany with the West on a basis acceptable to other Western European countries, including ourselves, can only be made certain through defence arrangements. It would be unsafe to allow Germany that degree of political independence which would enable her to rearm except under arrangements effectively controlled by the West and linked with the defence measures of the Allied Powers as a whole.

6. Thus the question of Germany's political status and that of her contribution to Western defence are closely connected, and in accordance with the decisions taken at the Brussels meeting of the North Atlantic Council they are to be settled together. It was on this understanding and to this end that the High Commission report has been prepared. The United States and French Governments are quite definite that a German defence contribution is the price for political equality. It is clear, however, that, in view of the rapid political evolution in Germany to which I have drawn attention above, we cannot escape from the necessity of pressing on towards a political solution with its corollary of a defence solution. The present intermediate position cannot be held much longer. A settlement which, while giving Germany a new degree of political independence, would eliminate the threat of the recreation of German national armed forces under German control is a necessary prerequisite for any lasting solution of the old problem of Franco-German enmity in Europe. This has been, and remains, a major British interest. The atmosphere, both in France and Germany, is now favourable for such a solution. But if this opportunity is now missed, it is unlikely to recur.

7. The High Commission's report concerning a new relationship between the Allied Powers in Germany results from the Brussels Conference of the North Atlantic Powers last December. At this meeting the three Foreign Ministers instructed the High Commissioners to elaborate in broad terms, for consideration by their Governments, a general outline of arrangements to be made with the Federal Republic of Germany, which would reflect changes in the present occupation régime by reason of Germany's participation in Western European defence. The goal was to be the establishment of relations between the Occupying Powers in Germany on as broad a contractual basis as possible, excepting such matters as could be resolved only in a peace settlement. The problems involved in working out such a relationship were to be explored with the Germans.

8. The main questions covered by the Report are summarily outlined in Annex I. What is involved amounts, in effect, to a peace treaty without territorial clauses, or a final settlement of claims against Germany. The central issue is that of the supreme or special authority of the Occupying Powers, deriving from the unconditional surrender of Germany. It is proposed in the Report to identify the fields in which the Occupying Powers will continue to exercise this authority. It is clear that in order to secure German agreement to the settlement we shall need to limit these fields to what is absolutely essential and that we must retain the exercise of our supreme authority only where it is vital to our interests as opposed merely to being desirable. It will also be seen from Mr. Acheson's message (Annex II) that he proposes the following definition:

(a) The right to station troops in Germany and to protect their security; (b) Berlin (which is not part of the German Federal Republic and where, therefore, our position rests on the power derived from the unconditional surrender); (c) The unification of Germany and a subsequent peace settlement; (d) Territorial questions.

I am in general agreement with this proposal, but it requires further clarification. In particular, "the right to station troops in Germany and to protect their security must specifically include the Allied right to resume supreme authority in an emergency. In fields in which contracts are concluded, the agreements will be binding upon both the Allies and the Germans and the exercise of supreme authority in those fields will thereby be renounced by the Allies.

09. Upon the entry into effect of the agreements, the Occupation Statute will be abolished and the Allied High Commission will be replaced by a Council of Ambassadors. Before that stage the three Governments will need to agree upon a charter for this council. Normally our Ambassador would deal direct with the German Government and German Ambassadors would be appointed in London, Washington and Paris.

10. The discussions in the High Commission and with the Germans have proceeded without commitment, though on our side there has, of course, been interdepartmental consultation, both during the discussions and since the High Commission's report has been produced. The report shows that differences between the United Kingdom and United States Elements in the High Commission are few and that it should be possible to resolve them without great difficulty. On the other hand, differences between the French Element and the other two Allied Elements are more numerous and more fundamental. The French have shown themselves anxious to interfere as little as possible with Allied supreme authority and they contemplate the persistence of Allied reserved powers in a number of fields. It seems unlikely at this stage that the French will be moved from these positions except in return for the satisfaction of French requirements connected with the European Army proposals. Annex I to this paper shows the general line which it is proposed that the Foreign Secretary should take in Washington.

11. The question of the European Army and of the German contribution towards Western defence will inevitably form an integral part of the discussions in Washington of a new political relationship for Germany. Mr. Acheson's and M. Schuman's messages show that in their view the two matters are intimately connected and the programme of discussion and study, of which the tripartite talks in Washington will form the first part, are designed to lead up to the North Atlantic Council meeting in Rome in the late autumn at which final decisions would be reached on both aspects of the German problem.

12. The United States Government have moved even more definitely than we supposed in the direction of supporting the European Army concept and although they appear to be taking a more optimistic view than either we or the French think justified about the progress made in the Paris Conference they are clearly determined to do their utmost to bring the European Army idea to fruition, as the only means by which they think the French will agree to a German contribution. We are accordingly attempting to arrange for discussions to take place on a military basis between the Americans, the French and ourselves in Washington before the meetings of Ministers, during which the somewhat vague and incomplete contents of the Paris interim report can be worked up into a more concrete plan, taking account of the practical points set out in the Bonn Report on the recent exploratory discussions with the Germans. General Eisenhower has expressed his readiness to be represented at these talks and has even offered himself to serve for an interim period as "Commissioner" of the European Army when formed. It is hoped that as a result of these discussions the three Ministers may have before them in Washington a set of proposals for the creation of a European Army, on which they might reach agreement in principle. These agreed proposals would then be injected into the Paris Conference so that some practical and effective plan would be ready for consideration by the North Atlantic Council at its Rome meeting in October or November.

13. As in the case of the contractual arrangements, this programme is a very tight one, but there is no doubt whatever that unless the Foreign Secretary is to come out openly as opposed to further progress on the European Army (involving, as it does, a German contribution) he will be compelled to discuss the matter in some detail with Mr. Acheson and M. Schuman in the middle of September. When the Cabinet considered this matter on 31st July (C.M. (51) 56th Conclusions. Minute 6) they were concerned primarily with the forthcoming Ottawa meeting of the North Atlantic Council, and with the Report on the Bonn discussions on the size, nature and organisation of German contingents. The emphasis now is on the European Army and the tripartite talks in Washington, and it is for this reason that it is necessary once again to consult the Cabinet on the general line to be followed.

14. In this connexion my colleagues should be aware of the far-reaching economic and financial problems which will arise from any German defence effort, on which a separate paper is being submitted to the Cabinet to-day. The Foreign Secretary will take full account of the considerations set out in that paper in any discussions which he may have on the German contribution to European Army.

Conclusions

I therefore hope that, before the proposed discussions with Mr. Acheson and M. Schuman begin, my colleagues will accept the following principles for the Foreign Secretary's guidance:

(a) United Kingdom and European interests alike require a settlement which will retain the German Federal Republic in the Western camp and will ensure that the Western German defence potential is available to the West and does not pass to the Soviet bloc. This is also a major factor in present United States policy, as Mr. Acheson has made clear.

(b) This policy carries two implications:

(i) for this purpose and having regard to the political evolution already achieved in Germany, there is now no possible alternative to agreeing to a further advance by the German Federal Republic towards political independence on a contractual basis acceptable not only to the German Government, but also to the main body of German public opinion;

(ii) the question of Germany's part in Western defence must be faced. We do not want an independent Germany whose security is the sole responsibility of the Allies without any economic or manpower contribution from the Germans themselves. As was explained in C.P. (51) 233, the defence of Western Europe cannot be assured except by the defence of Western Germany and this requires German participation. Moreover, it is only by associating her in defence with the rest of Europe that Germany can be firmly tied to the Western camp.

(c) The European Army concept, as advocated by the French and now strongly supported by the Americans, is primarily a method of ensuring that any German defence contribution shall be inextricably bound up with Western European defence as a whole and prevented from leading to the creation of German national armed forces.

(d) Provided therefore that the European Army plan can be made militarily effective and acceptable to the Supreme Allied Commander in Europe, the Foreign Secretary should give every encouragement to it and if possible reach agreement with Mr. Acheson and M. Schuman on the broad principles which should govern it. These would then be further examined amongst the participants in Paris, with a view to the submission of a concrete plan to the North Atlantic Council later in the autumn.

(e) All possible steps should be taken to ensure that the economic burden borne by His Majesty's Government for Western Defence is not increased on account of a German defence contribution.

C. R. A.

10 Downing Street, S.W. 1, 30th August, 1951. ANNEX I

REPORT OF THE ALLIED HIGH COMMISSION CONCERNING A NEW CONTRACTUAL RELATIONSHIP TO BE ESTABLISHED BETWEEN THE ALLIED POWERS AND GERMANY

General Principles Underlying the Allied High Commission's Recommendations

Supreme Authority

1. It is agreed that the Allies must retain the supreme or special authority derived from the unconditional surrender of Germany in 1945, but that they will identify the fields in which they will exercise it. There is agreement that Allied responsibilities relating to the ultimate Peace Treaty and the reunification of Germany, the right to maintain forces in Germany and, in emergencies, to take steps to protect their security, and the occupation of Berlin are not proper subjects for contractual arrangements. Mr. Acheson's formulation of these basic requirements is set forth in Annex II. The French wish to see Allied supreme authority maintained in a number of other fields, namely, in respect of reparations, occupation costs, security controls, offences against Allied security and expulsions. They are also reluctant to see the limitation of the supreme authority expressed in any contractual document. They would prefer a notification to the German Federal Government.

2. In the fields in which contracts are concluded, the agreements will be binding upon both Allies and Germans, and the exercise of supreme authority in those fields will thereby be renounced by the Allies.

Disputes

3. In the event of disputes arising out of the contracts, it is proposed that resort should first be had to discussion between the parties. If redress could not be secured, either party could refer to an Arbitral Tribunal. The Tribunal, which would be composed of an equal number of Allied and German members and a chairman of another nationality, would have power to take any action necessary to correct a violation, and to authorise the complainant to take specific direct action to redress the wrong in the event of the defaulting party's failure to comply.

Principles Underlying the German Attitude

4. The German Delegation has declared that if the eventual arrangements contain provisions which would not be appropriate in a Treaty between equal and sovereign States, they will be unacceptable to the Bundestag and to German public opinion. They have, however, admitted the existence of certain special problems and in these cases their position does not appear completely inflexible; they have, for example, envisaged proposals which would give Allied Forces somewhat greater rights than have normally been accorded to forces stationed by agreement in the territory of a friendly nation. They have also expressed themselves willing to consider the possibility of a contract regarding security controls, provided the conditions of the contract were such as to be politically and constitutionally feasible. Similarly, while they have demanded complete freedom from external intervention in the German governmental process and the relinquishment of present Allied legislative powers, they are willing to contemplate Allied emergency powers which would include certain legislative functions. The Germans also recognise the special character of the Allied position in Berlin. It must be borne in mind, however, that, whatever position the German Delegation adopts when the arrangements come before the Bundestag, the influence of German political parties is certain to be exercised in the direction of greater, rather than lesser, demands.

Areas of Disagreement and Line to be Adopted in dealing with them

5. The differences between the United Kingdom and United States positions are few and it should be possible to resolve them without great difficulty. Differences between the French position and the positions of the other two Allies are both more numerous and of a more fundamental character. The immediate object of the Washington meeting must be to surmount these inter-Allied differences so that the Allied representatives may present a common front to the Germans in a second round of exchanges of view which will have to be held before the Rome meeting. While, therefore, the following paragraphs deal principally with inter-Allied differences and the line which it is proposed to adopt in dealing with them, reference is made in certain instances to the difficulties with which the German attitude on particular problems is likely at a later stage to confront us.

Security Controls

6. The United Kingdom and United States High Commissioners have recommended that the contractual arrangements should provide for such minimum controls as security may require in the fields of disarmament and de-militarisation, scientific research, industry and civil aviation. The French High Commissioner believes that such controls should continue to be based on Allied reserved powers, exercised in the same manner and through the same channels as at present. The French position seems inconsistent with our political objectives.

7. It is therefore proposed to support the American proposal that the minimum safeguards required should be:

(a) those proposed last December by the N.A.T.O. Military Committee; viz. that Germany shall agree not to produce or manufacture (except as may be authorised by N.A.T.O. or other approved Western defence organisation) heavy weapons, military aircraft, naval vessels other than minor defensive craft, atomic, biological and chemical weapons or long-range missiles; or any specific productive, testing or training equipment or components associated with the development, production or use of such material;

(b) that, in addition, restrictions shall be maintained over atomic energy materials and facilities, and prohibitions be maintained over the production of civil aircraft and some electronic tubes. This proposal would entail further modification of existing industrial controls (see C. P. (51) 89).

Preservation of Democracy

8. The French High Commissioner recommends that the Germans should be required to undertake to maintain a basically democratic and federal form of government, in which civil liberties are protected and the decentralised structure of the police preserved. The United States and United Kingdom High Commissioners, while favouring some such declaration of intention in the preamble of the contract or agreement, would not be in favour of providing for an Allied intervention in the German constitutional system except in an emergency in which security was affected. French motives in this matter are suspect; the French would certainly wish to use a general undertaking of the kind envisaged by the French High Commissioner as a means of perpetuating the present constitutional weakness of the Federal Government, which is already an embarrassment to us. While it is recognised that a fundamentally undemocratic development in Germany would imperil Allied security, it seems politically wise not to attempt to extract particular undertakings from the Germans in this field. We should rather rely on the provisions of the German Basic Law and the Constitutional Court which we hope shortly to see established, and upon the concept of Allied security as our proper recourse if anything goes fundamentally wrong.

Logistical and Financial Support of the Allied Forces

9. The United States and United Kingdom High Commissioners consider that these questions should be regulated by a contractual arrangement, while the French High Commissioner considers that occupation costs should continue to be levied by Allied authority. The French position here is unrealistic. In the absence of inter-Allied agreement of this subject and of a decision regarding a German defence contribution, it has not been possible to have detailed discussion with the Germans in this field. We have however a clear idea of our own requirements regarding logistical support when the time comes for such a discussion. A separate Cabinet Paper (C.P. (51) ) has been prepared on the economic and financial implications of a German military contribution to Western defence.

Security of the Allied Forces

10. There is inter-Allied disagreement regarding the extent to which the Allies should in future rely upon the Germans to deal with offences by Germans against Allied security and to carry out the expulsion of undesirables from the Federal territory. The French High Commissioner believes that certain exceptionally serious offences should in normal circumstances only be triable before Allied Courts; the United States High Commissioner believes that, although such offences should normally be tried by German Courts, the Allies should retain the right to withdraw cases from the German Courts for trial by Allied tribunals. The United Kingdom High Commissioner considers that a stage will have been reached at which the Allies should retain no jurisdiction to try Germans. This seems to be the only position which we can expect the Germans to accept. As a corollary, we shall have to rely upon the German authorities to arrest, detain, interrogate and expel German and other non-Allied security suspects, as soon as efficient German services can be provided for that purpose.

Legal Status of Allied Personnel

11. There is inter-Allied disagreement regarding the status of Allied nationals serving with the Council of Ambassadors, and their dependants. The United States and French High Commissioners would wish to ensure for such persons the privileges and immunities provided for Allied military personnel, whereas the United Kingdom High Commissioner believes that these persons should enjoy only such immunities and privileges as are normally accorded by diplomatic usage. The United Kingdom High Commissioner also considers that the Allies should not attempt to retain any Allied tribunals in Germany except courts martial; it would be difficult to expect the Germans to accept any other arrangement. The Air Ministry agree and although the War Office would prefer to see the present Control Commission Courts retained, they recognise that this may be politically impossible.

Reparations

12. The French High Commissioner alone considers that Allied reserved powers should be retained in this field. Apart from this question of principle, the Allies are agreed on the scope of the undertakings which we should wish the Germans to assume in this field. The treatment of German external assets is, however, a field in which we must expect major German resistance.

Foreign Interests

13. The Allied High Commission has not yet been able to inform the Germans of Allied requirements regarding foreign interests and establishment rights in Germany. It is hoped, however, that Governments will shortly be able to approve a detailed report on this subject so that discussions with the Germans can take place.

Form of Arrangements

14. The High Commissioners recommend that the subjects which Governments agree to place on a contractual basis should be grouped into a small number of agreements. They recommend that there should be a General Convention containing provisions of general applicability. This Convention should be given a form which summarises the salient points of the new relationship and can be readily understood by the general public; it will be seen from Annexes II and III that we are in agreement with the United States Government on this point. It is of interest that the United States High Commissioner has already produced a draft of such an agreement: the general lines of this seem satisfactory. It is not clear whether the document carries State Department approval, but we shall certainly hear more of this. To this General Convention should be attached, either as annexes or as related conventions forming a single whole with the General Convention, a series of arrangements covering the arbitral tribunal, security controls, status and protection of members of the Allied Forces, logistical and financial assistance to the Allied Forces, the foreign relations of the Federal Republic, its relations with other parts of Germany, certain Allied programmes in Germany and the protection of certain interests (e.g., decartelisation, restitution, reparations, foreign interests in Germany and Displaced Persons and refugees). Dear Mr. Morrison: I have been thinking a good deal about the range of problems we face jointly in integrating a German contribution into the defense of Europe and in establishing a new contractual relationship with the German Federal Republic. We clearly ought to reach a common understanding as to how satisfactory solutions to these problems can be reached as quickly as possible. Accordingly, I am writing to you personally with a view to agreement upon a working program which will enable us to reach decisions on the various questions involved. In view of this purpose, I shall not attempt here to discuss detailed solutions to these problems since I believe this can be handled more satisfactorily through appropriate channels after we have agreed upon the general approach.

The urgency of these matters arises from their inseparable connexion with building the defense of Western Europe. We all agree that our common plans for Western European defense will not be complete without a German contribution. We also agree, and recognised at Brussels, that a German contribution depends upon simultaneous progress in adjusting relations between the Western occupying Powers and the German Federal Republic. Nor is the immediate problem of defense the only reason for urgency. Both of the above matters bear directly upon the development of further consolidation of continental Europe, which depends to a great extent upon decisions soon to be made—the ratification of the Schuman Plan and the success of the efforts now being made in Paris by European nations to establish a common defense community.

Our approach to these problems has not been a static one. We have thought—and still think—that rapid progress toward continental European association within a developing Atlantic Community is essential to our common peace and prosperity, and to that of the whole free world. We have also thought—and still think—that urgent progress in realising our common hopes for a concrete German contribution to Western defence is also essential. During the past year we have given full support to the development of a European defense force under the Atlantic umbrella as a long-range concept to which all of our efforts should be devoted. At the same time we have thought that the urgency of securing a German contribution to defence required an interim solution which would allow German preparations to get under way in such a way as to be compatible with the longer range goal of establishing a truly European defence force.

We now see a real hope that these two objectives can be combined. The recent and striking progress made in the Paris Conference on the establishment of a European defense community makes it possible that a German contribution can be obtained quickly through the establishment of a European defense force. General Eisenhower believes this can be done. We are prepared to act on the basis of this hope and possibility. We will give the fullest support to a programme which would combine the short-range necessity of obtaining the German contribution quickly and the fulfilment of the long-range concept of the establishment of a common defense force in Europe. We will do this vigorously if the continental European nations themselves approve this course, if they will promptly work out the military aspects satisfactorily to the N.A.T.O. Military Committee and to S.A.C.E.U.R., and if they will complete the process in time to allow Germany's contribution to become effective within the time schedule we have all agreed must be urgently met for the defence of Europe. For this reason we believe it essential that the full elaboration and final implementation of all the necessary administrative structures and political arrangements in connexion with the European defense force would not be a condition precedent to the actual beginning of German defense preparations. We would hope that agreement in the Paris Conference, acceptable to N.A.T.O. as a whole, could be reached this fall among the European nations participating at Paris which would allow initial preparations in Germany to proceed pending the final and formal act of establishment of the European force. We believe such steps can be taken without prejudice to the security considerations, relative to German rearmament, which we all have in mind.

With these considerations in mind I turn to a plan for moving to rapid agreement on the new political relationship to be established between the Western occupying Powers and the German Federal Republic. We agree, I think, that the progress made in this field must be equal to that made in the defense field. For a variety of reasons the three Governments have been slow in this field and my present concern is that the completion of an agreement recording a basic change in our relations with the Federal Republic might in itself be a delaying factor in its entry into defense. The cumulative effect of recent world events and the present temper of German opinion make it not only necessary, but in our own interest, to put forward, simultaneously with the military solution, a political formula of a far-reaching nature. I also believe that we cannot ignore the effect in Germany of the forthcoming peace treaty with Japan.

I suggest that in general the Germans should be given full power to conduct their own affairs and that the powers we retain should be determined solely by the fact that Germany is a divided nation confronted with a menace to its security beyond its own control. Our mission there should be changed from one of "occupation" of the territory of a defeated enemy to one of assistance to a partner who is freely contributing to our mutual defense. This will involve, as we have already agreed, abolishing the OCC Statute and the High Commission. Supreme authority would be retained in four fields only: (a) the right to station troops in Germany and to protect their security; (b) Berlin; (c) unification of Germany and a subsequent peace settlement; and (d) territorial questions. I believe we should also begin to give thought now to the admission of Germany to N.A.T.O. as a full member after she has obtained this new political status and final decisions have been taken on Germany's defense contribution. By proceeding along these lines I believe there is a good chance of building a solid foundation for future German co-operation with Western Europe and the whole Atlantic Community.

The High Commissioners are now working on a report to Governments on results of their political conversations with the Germans. We should receive this report within a few days. The High Commission has done a great deal of essential work in exploring the numerous complex problems to be dealt with. But I am told that they will be unable to reach agreement on a substantial number of fundamental questions regarding Germany's new status. Governmental agreement on these matters will clearly be necessary prior to final negotiations with the Federal Republic. So it seems to me that we should make this one of the primary subjects to be dealt with by the three Foreign Ministers when we meet here in September. I would urge that we be prepared to reach tripartite agreement on these matters at that time. In view of the work schedule we all face this fall, the High Commission, after submitting their report, should continue to work together and with the Germans on certain matters which do not have to be reserved for our personal consideration in the conference in Washington.

In the light of what I have said, I suggest the following working program: —

(1) We should each give urgent attention to the forthcoming High Commission report on their discussions with the Germans on contractual relations. We should exchange views as soon as possible after study of their report, and do such other preparatory work as will enable us to reach tripartite agreement on all matters presented in their report when we meet in September.

(2) Agreement reached in our tripartite discussions in Washington on Germany's new status should be sufficiently complete so that the High Commissioners could subsequently conduct and conclude final negotiations with representatives of the German Federal Republic. We should do our best to give them a text of a basic agreement with the Federal Republic along broad lines susceptible of public understanding. We would also, of course, discuss progress on defense arrangements with special emphasis on the accomplishments at that time of the Paris conference.

(3) The three Foreign Ministers should meet in Europe in late October before the meeting of the North Atlantic Council to reach final agreement on contractual relations. Sufficient progress should have been attained in Germany so that the German Foreign Minister could join our meeting. We should aim for final Four-Power agreement then. By that date, also, I hope that a completed treaty on the establishment of the European defense community would have been signed by Governments and be ready for submission to Parliaments. This would allow the simultaneous submission in the German Bundestag of the final arrangements on both the political and military aspects of Germany's association with the West. I am sure we all agree that this is essential. Both from our point of view and from the German point of view questions of political equality and military contribution must be finally considered and decided together.

(4) At the meeting of the North Atlantic Council in late October, we should endeavour to obtain final agreement on those aspects of the above arrangements which are within the competence of that body. At this meeting we would make the appropriate formal disposition of the N.A.T.O. action regarding a German contribution assigned to the three Powers at Brussels and of the separate mission undertaken by European nations to plan for the formation of a European defense force. In other words, we should aim for final agreement, acceptable to N.A.T.O. as a whole, on the problem of the German defense contribution at that time.

If some schedule along these lines seems possible to you, I suggest that we should, for the present, postpone any formal action on the report recently received from the High Commission of their discussions with German representatives at Bonn on a German military contribution.

Such a schedule of work and accomplishment would put us well on the road to a stabilisation of the German problem and a major strengthening of our own defenses. In confining this letter to the subjects which I have discussed, I do not intend to limit the scope of our talks in September about which our representatives will continue to consult.

I would greatly appreciate receiving your views.

I am sending a similar letter to M. Schuman.

ANNEX III

TEXT OF THE FOREIGN SECRETARY’S REPLY OF 16TH AUGUST TO MR. ACHESON’S LETTER OF 9TH AUGUST

My dear Acheson,

I was very glad to have your personal message communicated by the United States Embassy about the problems which we face jointly in integrating a German contribution into the defence of Western Europe and in establishing a new contractual relationship with the German Federal Republic. I have been giving much thought to these questions and I am happy to see that we are thinking on similar lines.

As regards the contractual arrangements I have only just received the Report which the High Commission has prepared and have not yet had time to study it. My first impression is, however, that the United States and British Elements are in agreement on most essential points. Our first objective must be to reach tripartite agreement and I hope this will be possible when we meet in Washington in September. You will already be aware that I have suggested to this end that our meeting in Washington should be preceded by tripartite official talks. Like you I hope that agreement in our tripartite discussions will enable the High Commissioners to conduct and conclude final negotiations with representatives of the German Federal Republic. I would attach importance to the production of a basic agreement with the Federal Republic along broad lines which will be readily understood by the general public.

The central problem in the contractual negotiations is that of the retention of supreme authority by the three allies. I agree that the fields in which supreme authority would be retained should be defined. While, however, I am in broad agreement with the four points mentioned in your message, the precise definition of these fields clearly requires further consideration prior to our meeting next month.

I agree with you on the urgency of pressing on towards a decision on these questions. The working programme which you suggest is a very tight one. We will do our best to adhere to it, but it is clear that the contractual relationship is not a question that can be considered by itself. As you say, both from our point of view and from the German point of view questions of political equality and military contribution should be finally considered and decided together.

As regards a German defence contribution, I agree that the establishment of a European defence force may well offer an acceptable solution. Before we give our full support to this project, however, I think we must first be sure that it is a practicable proposition and can be satisfactorily organised for the efficient defence of Europe. I note your view that the recent striking progress made in the Paris Conference makes it possible that a German contribution can be obtained quickly in this way. We have no information on this beyond the interim report of the Conference, which is, as you know, vague and incomplete on many points of military detail. We are now looking at it and I am sure it would be valuable to discuss it with M. Schuman in Washington. In the meantime, since the time factor is important, I think it would be useful if our national representatives on the Standing Group could study it from a practical military point of view. At the same time, I think they should make use of the report from the High Commission on their discussions with the German representatives at Bonn, since it contains much useful practical material on the possibilities of a German defence contribution.

We shall, of course, have to consider the big issue of Germany's admission to the North Atlantic Treaty Organisation at a later stage in the light of the progress achieved in regard to her new political status and her defence contribution.

I am bound to say that the final phases of your proposed time-table strike me as a bit ambitious, given the complexity of the subject. But you may be sure that my colleagues and I, for our part, will do our best.

ANNEX IV

TEXT OF THE FRENCH FOREIGN MINISTER'S REPLY TO MR. ACHESON'S LETTER OF 9TH AUGUST

Dear Mr. Acheson,

Thank you for having been kind enough to inform me, in your letter of 9th August, of your personal views on the fundamental problems which are to be discussed in our conversations in Washington in September.

My reply, which is also made in a personal capacity, has been delayed by the need to consult the new Government on the multiple and serious problems which will be examined in the course of the coming Conferences and which cover the responsibilities of several ministerial departments.

Let me first tell you how happy I am to note the interest you take in the efforts which France is at present making to create a European Community, and the support which your Government is giving to our plans.

This policy is being manifested by the ratification and rapid execution of the Plan for a Coal and Steel Pool, now laid before the six Parliaments concerned, and the elaboration of the Treaty concerned with the organisation of a European Defence Community which we intend to complete as shortly as possible. We will thus be brought to the preparation of a real political community between the free States of Western Europe, including Federal Germany.

These initiatives have been inspired by the governing idea, to which my Government rests firmly attached, of integrating Western Germany, on a basis of equality, in a European community, itself included, in your own words, "in an Atlantic community continually developing." It would thus be possible to renounce a system of control whose guarantee is force and which would not be—as the experience of the period following the First World War proved—a satisfactory and lasting solution. At the same time the risk must be avoided, so serious to peace and for the Germans themselves, of rebuilding a nationalist Germany which might be tempted to play off East against West.

It is then from this point of view that we should, I think, tackle with Mr. Morrison the examination of the German problem.

I need not underline the fact that France wishes ardently that Great Britain should be able to participate in these arrangements, or be associated with them in a manner corresponding with her interests. If, for her own reasons, and of these she must be the only judge, Great Britain were unable to take an integral part in the European Community, we would regret it, being assured however that, in conformity with the general aim of our common policy, Great Britain would make every effort to facilitate our action and would co-operate closely with the United States and the European Community in the Atlantic framework, which would thus be reinforced.

The policy of European union implies for all those who participate in it, and for France in particular, important sacrifices, a fundamental modification of tradi- tional systems which have been established for centuries, and sacrifices of sovereignty to supranational authorities. But we feel that we make this contribution not only in our own interest but in that of the whole of the Atlantic Community. If this French initiative makes the integration of Germany into Western Europe possible, it will be to the advantage of all democratic and peaceful countries.

The only too recent past has unfortunately taught us that Germany was subject to rapid and unpredictable evolution. We must, in our own interest and in that of the Germans themselves, forearm the Atlantic Community against such possible evolution. If we wish the integration of Germany in a strongly organised Europe to be, and to remain, an efficacious guarantee, we must in our forthcoming meetings foresee the necessary precautions. Moreover, the Europe in which we wish to include Germany will not be set up overnight. Its constitution will necessitate delays of which we must take account.

I am happy to note our agreement on the fundamental principles on which the new situation of Germany should be based. I think that, after a preliminary meeting of experts at governmental level, we could reach a rapid conclusion on all the essential points, taking as a basis the Report of the High Commission and the recommendations of the London Working Party. I believe, as you do yourself, that we will not have enough time to study the details of these documents, and the most important thing for us to do is to reach agreement on general directives which will enable our representatives to continue and finish their work. But it should be clear that the new contractual statute should not be put into force before the Treaty for the organisation of the European Defence Community is signed and ratified by the Parliaments concerned, amongst them the German Parliament. Similarly, I would like to remind you that we had concluded that the International Authority of the Ruhr could not be abolished before the entry into force of the Coal and Steel Plan.

As regards the contribution of Germany to common defence, I entirely understand your wish to proceed rapidly to concrete action. You therefore quite legitimately wish not to await the final conclusion of all the administrative and political arrangements regarding the European Army before taking a certain number of preparatory measures for the organisation of defence in Germany. I would agree with you if this is not to be the beginning of the execution of plans and if the measures undertaken do not include the recruiting of soldiers in Germany. It is indispensable to my mind that the first man recruited in Germany should be able to wear the European uniform, just as, from the time the Community is set up, the forces provided by all the participants should become European. Should there exist at any time the embryo of a German army, the whole basic idea of the European Defence Community risks a definite check. We should therefore examine with great care the nature of preparatory measures which would be at once both necessary and compatible with the success of our plan. Moreover, I can assure you that, with the help of S.H.A.P.E., we will do all in our power to ensure that the drawing up and putting into effect of the Treaty should be achieved with the minimum of delay. Our objective is to establish a text by the end of October. I would also like to remind you that as soon as the Treaty is ratified, the machinery foreseen therein will be set up. Recruiting could then begin in Germany, even if the European organisation only began to function progressively.

I believe that it is most inopportune to bring up the question of the entry of the German Federal Republic into N.A.T.O. in the present circumstances. Our whole European policy, and in particular the integration of German forces, would be compromised by the possibility of the direct access of Germany into the Atlantic Community. I feel it my duty to point this out to you forthwith. We could later examine the way in which the European Community could be harmonised with other international organisations once it had been established economically, militarily and politically.

These are, dear Mr. Acheson, the principal problems which are so important for the future of our countries and which I have taken up in this letter. We shall certainly have occasion to discuss them at length in Washington and then in Ottawa and in Rome. I wonder, however, if it will be possible to adhere to the time-table fixed, given the importance of these questions added to others. We can discuss this again in the course of our coming meeting.

Believe me, &c.

(Sgd.) ROBERT SCHUMAN. CABINET

PERSIA: STERLING CONTROL ORDER

Memorandum by the Chancellor of the Exchequer

The problem

By virtue of the arrangements contained in a "Memorandum of Understanding" Persia receives from us very favourable treatment in the financial sphere under three headings:

(i) Transferable Account facilities, which allow her the privilege of automatically making or receiving payments in respect of third countries in sterling;

(ii) a gold revaluation guarantee (which cost us £11.4 millions at the time of revaluation);

(iii) Facilities for conversion of sterling into dollars in payment for certain invisibles and for essential goods not obtainable on equivalent terms for sterling.

These arrangements have been renewed by negotiation every year since 1947: and their sole justification has been the profound importance of Persian oil to our economy. Persia continues to be able to make use of these privileges despite the fact that we have now not had the benefit of her oil since June and, moreover, have been forced to spend some £120 millions on replacement. Persia is in fact taking dollars of the order of $650,000 a week; and the Persian sterling holdings to which the privileges of the Memorandum of Understanding apply amounted to £17 millions at the end of July. Until very recently £10 millions of this were immobilised by Persian law in the note cover; but legislation to free this sum has just passed its final stages, so that the Persians now have access to it to meet current expenses.

Although the current "Memorandum" terminates on 19th November, it contains a clause to the effect that any balances existing on its expiry shall continue to carry the privileges in (i), (ii) and (iii) above. The proposed Order and what it would do

2. Preparations have been made for the promulgation of an Order placing all Persian transactions in sterling under control. It is not designed to "freeze" Persian sterling completely. It will nullify the "Memorandum of Understanding" arrangements by removing Persia from the transferable account area: so that instead of Persia having an automatic right of transfer of sterling, her sterling payments and receipts will become subject to the permission of the Treasury (exercised in practice through the Bank of England). It is the intention that the Bank should allow all normal transfers of sterling except:

(a) Transfers to American Account (which is the mechanism by which Persia can obtain dollars for her sterling); (b) transfers relating to oil, i.e. oil itself, oil equipment, tanker hire, insurance, etc; and (c) transfers relating to certain scarce commodities, e.g. sugar, iron, steel, non-ferrous metals and alloys.

The measure is accordingly not intended as retaliation or sanctions against Persia, but merely as a protection to our own economy by giving us the means of withdrawing specially favourable facilities no longer justified.

Complementary measures in the trade sphere

3. As a corollary to the dollar conversion facilities granted to Persia, every attempt has been made to diminish calls on us for U.S. dollars by making available to her scarce goods which she would otherwise have bought in the U.S.A. Consequently, with the withdrawal of the dollar facilities, it will no longer be necessary to deprive ourselves or the Commonwealth of these scarce goods, and action has been prepared to ensure that they no longer go to Persia. The Board of Trade are ready to make an Export Control Order under which all existing licences for exports to Persia of specified scarce goods would be revoked. The making of this Order is being held up until the Sterling Control Order is made. Once the Export Control Order had been made no new licences would be issued for these scarce goods except in special circumstances.

The delay

4. The order has not actually been made so far because it was thought that it might prejudice the success of negotiations. Nor was action taken immediately on the return of the Lord Privy Seal's mission:

(a) in case it should provoke interference with the Anglo-Iranian Oil Company (A.I.O.C.) employees withdrawing from the oilfields; (b) in order to allow a few days for the implications of the suspension of the talks to be fully realised in Persia; and (c) in case it should be regarded in Persia as an economic sanction and thus make it more difficult for moderate opinion there to assert itself.

Future action

5. It is becoming increasingly difficult to justify further delay. The consideration at 3(c) above is no longer relevant: and as far as (b) and (c) are concerned I believe that, provided we are careful to make it clear what we do and do not intend to do, we may even succeed in hastening the fall of Dr. Mossadegh. At the same time we should be in a position to give heart to any successor by the withdrawal of the Order in return for reasonable assurances about a settlement of the oil dispute. Also, once the present obvious opportunity to take action has been lost it will be less convincing for us to say that the measures are merely protective, and they will inevitably savour more of sanctions.

While the arguments for delay are losing their force, the case for action grows stronger. Public opinion in this country will not tolerate indefinitely either the continued dollar drain on Persian account or the fact that by leaving Persia in the Transferable Account Area we ourselves are according to her the means of receiving payment for the oil denied to us. Our dollar situation is deteriorating rapidly. Moreover if we do not act now, action later may appear to have been extorted by the Opposition, or the Press.

The attitude of the U.S.

6. It is, of course, extremely important that we should do nothing to upset the close co-operation which has recently been achieved with the Americans. Our position was explained to Mr. Harriman while he was in London and he will no doubt report to the U.S. Government on his return to Washington. In addition, I propose that while action on our part should not be subject to their consent, we should ourselves approach them at once and then, having made our motives and intentions known to them, take action immediately afterwards.

Abnormal dollar conversions

7. It is possible that the Persians may attempt to withdraw the whole £14 millions, or a substantial proportion of it, and either to convert this into U.S. dollars through the mechanism of the "Memorandum of Understanding", or to transfer it elsewhere, out of reach of our control. I have arranged that any such attempt should be made known to us at once, and, as the Cabinet has previously agreed, should be frustrated by the immediate issue of the Order.

Recommendations

8. I recommend -

(i) That if the Persians attempt to make any abnormal movements of sterling, the Order should be made forthwith. (ii) that the U.S. Government should be informed of our intention to make the Order and, unless their reaction against it is very strong, that it should be issued immediately thereafter.

H.G.

Treasury Chambers, S.W.1.

3RD SEPTEMBER, 1951. CABINET

THE BALANCE OF PAYMENTS POSITION

Memorandum by the Chancellor of the Exchequer

At the beginning of July (E.P.C. (51), 14th Meeting), we considered the report on the 1951-52 balance of payments (E.P. (51), 53). This estimated a dollar deficit for 1951-52 of $2500 millions, and a United Kingdom overall balance of payments deficit, including stockpiling, of £375 millions.

2. At a later meeting (E.P.C. (51), 17th Meeting), the committee considered a further report on import cuts (E.P. (51), 9), which pointed out that the position had worsened. I warned my colleagues that we were expecting a dollar deficit in the third quarter alone of almost £330 millions, and that this meant that by the end of the year gold and dollar reserves might be reduced to about $23,053 millions, and that by the spring one-third of the gains made since devaluation would have been lost.

3. The course of events since then has confirmed these fears. The course of the dollar surplus and deficit this year has been:

| Month | Sterling area dollar surplus or deficit (£ millions) | |-------------|-----------------------------------------------------| | January - March (average) | + 120 | | April | + 59 | | May | + 1 | | June | - 6 | | July | - 137 | | August | - 211 |

4. There have been many non-recurrent expenditures in the last two months, and I should expect the rate of deficit to fall in the next few months. But all the evidence suggests that there will be a continuing deficit, at a rate which will rapidly make serious inroads into our reserves, swallow up the gains which we have made since devaluation, and leave us in a critical position.

5. The new factors in the situation since June are:

6. Persian oil. I have already had to authorise the spending of £150 millions to replace Persian oil, and this will last only to the end of the year. If there is no settlement, the cost of replacing the oil would be about £55 millions in 1952, against this we would save perhaps £75 millions by withdrawing the special arrangements we have with Persia which enable her to convert sterling into dollars for certain purposes.

(ii) European Payments Union (E.P.U.). In July and August, we have been in large deficit in E.P.U., and the estimate for the quarter is £130 millions. This is always a bad quarter, because of expenditure by tourists and on fruit and vegetables. But our deficit has been much larger than anything that could be accounted for by seasonal influences; there has been a rapid increase in our own and the other sterling area countries' imports from Europe, and this is the dominant factor. The result is that we have had to repay all the dollars we earned from E.P.U. last year; we will have repaid the credits we have given them, and from the end of this month onwards we shall be drawing credit from E.P.U., and if our deficits persist, paying dollars at a later stage. In 1951-52, we shall probably lose £150 millions.

(iii) Other sterling Commonwealth. The continued fall in wool prices, and the falls this year in rubber and tin prices, are reducing the sterling area's dollar earnings, while the dollar (and other) expenditure of the other sterling area countries is rising very fast, for the same reasons as ours is. The worsening compared with our June estimate may be £250 millions a year.

In June, the dollar deficit for 1951-52 was put at around £500 million. These three new factors above would raise it to something approaching £1,200 millions. In view of what has happened in the past, there is no need for me to stress the importance of this change in relation to reserves which at the end of June were no more than £3,870 millions.

We had hoped that the United Kingdom deficit with the dollar area (over £1,000 millions, excluding Persian oil replacement) would be considerably offset by the other sterling area countries' dollar earnings, and that we should not lose dollars heavily elsewhere. But these new factors frustrate this hope: indeed, the rise in the cost of our imports from all sources is threatening loss of supplies or payments of gold or dollars all round the world. With Finland, for example, a vital source of timber, pulp and paper, we have a 1951-52 prospective deficit of £50 millions. What we are involved in is a deterioration of the position of the whole sterling area vis-à-vis virtually the whole of the rest of the world.

In the background, I would refer to the problem of Germany. If it became necessary for us to pay the local costs of our Forces, instead of the Germans paying them as occupation costs, this would be an additional burden of up to £180 million a year on our E.P.U. deficit and on our overall balance of payments. This is an additional load which we cannot possibly bear.

During the last fifteen months, the world economic situation has been changing with bewildering rapidity, and inevitably our fortunes rise and fall accordingly. That is why my predecessors and I have continually stressed the importance of having large reserves. Thus the sterling area faces a dollar deficit in 1951-52 of £1,200 millions compared with a surplus in 1950-51 of £1,000 millions; and the United Kingdom position on overall account deteriorates from a surplus of £250 millions in 1950 to a deficit of £400 millions in 1951-52. These facts illustrate how we can never afford to take our eye off the balance of payments and regard our situation as stable. 10. We have had two objectives in our external financial policy—first, to remain independent of general economic assistance from the United States; second, to maintain overall balance, excluding stockpiling, in our external accounts. The second objective is already frustrated for this year. If we allow the reserves to run out without taking the necessary measures, external and internal, to right the situation, we shall be unable to maintain the first objective either.

11. After my return from North America I will make further positive proposals to my colleagues. In the meantime I ask that everyone should take into account the seriousness of the situation in any policy decision which may be made in the next few weeks.

12. I propose to inform Mr. Snyder and other members of the United States Administration of the worsening of our situation. This will be the background to a series of talks on specific economic issues where action by them could assist us and to the more general discussions at Ottawa on sharing the burden of rearmament.

13. I also propose to inform the other Commonwealth Finance Ministers of the situation in the course of my visit to Washington, and to ask them to consider measures to deal with the situation so that we can take effective combined action at the meeting of Commonwealth Finance Ministers which I hope will be arranged at the beginning of January.

A.G.

Treasury Chambers, C.W.I.,

3RD SEPTEMBER, 1951. CABINET

SUPPLIES OF FINISHED MILITARY EQUIPMENT FROM THE UNITED STATES

Memorandum by the Minister of Defence

As a result of an initiative by the Economic Steering Committee, and with the approval of the Chancellor of the Exchequer and myself, the United States Government was informed in March last of our intention, as soon as the £4,700 millions defence plan was worked out in further detail, to transmit to the United States a statement showing how far production under that programme would go towards completing the equipment of the forces which the United Kingdom intended to raise and maintain, and indicating the extent and nature of the deficiencies of equipment which would remain when the programme had been completed. The American Government were informed that these deficiencies were expected to be very considerable - a tentative figure of between £1,400 millions and £1,800 millions was mentioned - and that His Majesty's Government would hope to discuss with them the extent to which these deficiencies could be met by the supply of finished military equipment under the Mutual Defence Assistance Act.

02. The production programme within the £4,700 millions rearmament plan was approved by the Defence Committee at its meeting on 31st July, 1951 (D. O. (51) 21st Meeting, Item 1). It was made clear from the beginning that this programme would by no means meet all the requirements of the Services, and it has now been possible to assess the extent of the deficiencies in equipment which will remain when it has been completed. On the basis of this assessment, a further memorandum for presentation to the United States Government has been prepared. In its preparation, certain issues of policy have emerged on which I think that it is desirable to have the views of the Cabinet.

03. Broadly speaking, the deficiencies of the Royal Navy and the Royal Air Force are of types of equipment which cannot be produced in the United Kingdom within the three-year period and which are required to fill gaps in the equipment of formations which will otherwise be fully ready to fight.

04. The Army's problem is not so simple. In general terms, the production programme for the Army under the £4,700 millions defence plan will provide new equipment for approximately 15 divisions. Existing stocks of equipment will serve to outfit a further 7 divisions, with the very important exception of 'B' vehicles. There will, however, be other serious gaps in the equipment of the 22 divisions whose needs will be met primarily from British production; these consist of types of equipment which are not produced in this country and can only be obtained during the next three years from the United States.

05. By mid-1954 there will be 24 United Kingdom equivalent divisions either already active or available for mobilisation in the early stages of a war if equipment is ready for them. These consist of the Regular Army of 10 $\\frac{2}{3}$ divisions, the Royal Marine Commandos, which are equivalent to one division, and the first and second lines of the Territorial Army, which by that date under the operation of the National Service system will amount to 12 $\\frac{1}{3}$ divisions. We can from our own resources, and subject to the filling of the gaps mentioned above by the United States, provide equipment for only 22. Even if we assume that all the equipment which we produce is allocated to United Kingdom divisions, there will thus still be 2 divisions lacking equipment at that date.

06. Such an assumption would, however, be unsound, as there are certain forces of the Colonies, of Commonwealth countries, and of foreign countries in Treaty relations with us, which we expect to come to the support of the United Kingdom in a global war, which are essential for that purpose, and for which the United Kingdom will be expected to provide the great bulk of equipment. These forces include the Commonwealth divisions which are expected to operate in the Middle East, the Arab Legion, and the Iraq Army. Together they will amount to about 7 divisions; the Colonial forces amounting to some $1\\frac{1}{3}$ divisions.

07. From the United Kingdom land forces, we have accepted as our interim contribution to the Medium Term Defence Plan of the North Atlantic Treaty Organisation (N.A.T.O.) a commitment to provide 9 divisions in the European theatre by the end of the first three months of war. The remainder of the forces in being at the beginning of a war or capable of immediate mobilisation will be required elsewhere, principally in the Middle East and the Far East. The forces which will be mobilised subsequently will be allocated to theatres in accordance with the higher strategic direction of the war.

08. The total equipment requirement of these formations amounts to $32\\frac{2}{3}$ divisions, towards which, as I have mentioned in paragraph 6, the United Kingdom will be able to provide only 22 divisions worth, which will therefore contain serious gaps. There are thus approximately 11 divisions for which no equipment will be available under present plans by mid-1954 and which, unless equipment can be found for them from other sources, will not be ready to fight until equipment can be supplied for them from United Kingdom production after the outbreak of war.

09. The total cost at United Kingdom prices of providing equipment for these 11 divisions, and to fill the gaps in the equipment of the land formations for which the United Kingdom will be primarily responsible, and of the United Kingdom naval and air forces, is estimated to be approximately £1,500 millions.

10. The memorandum which officials have prepared for presentation to the United States Government explains this situation, and proposes that ways and means of meeting the deficiencies disclosed should be discussed between the two Governments. It suggests that the Americans should indicate to what extent they would expect to be able to assist by providing finished military equipment under their Mutual Defence Assistance Programme (end item aid). It also points out that the United Kingdom must look at defence globally, and that the present criterion for grant of end item aid, which limits it to forces earmarked as contributions to N.A.T.O. or for the defence of the United Kingdom base, is artificial and should no longer apply. If the Americans are unable to interpret their legislation so as to widen the criteria in this way, they are asked to accept the thesis that the primary commitment of the United Kingdom must be the equipment of those forces which are ineligible for end item aid and that the resultant deficiencies would thus fall wholly or largely upon the forces committed to N.A.T.O.

11. The proposed approach to the Americans has been based on the assumption that all we intend to ask for is end item aid to meet the deficiencies which will remain when our own £4,700 millions plan has been completed. Hitherto, there has been no suggestion that we should ask for aid in relief of our own defence production programme under the £4,700 millions rearmament plan. I understand, however, that the Chancellor of the Exchequer is of the opinion that, in view of the recent serious deterioration in our general economic position and particularly in the balance of payments, we should now consider whether we should not make some reference to the possibility, to put it no higher, that we may find ourselves compelled to reduce our own programme and to seek a greater amount of end item aid in consequence.

12. I am myself extremely doubtful whether it would be wise even to hint to the Americans at this stage that we may be contemplating a retreat from our declared intention to carry out our full rearmament plan as our appropriate contribution to the defence of N.A.T.O. and the whole free world. I fear that any suggestion of this kind would destroy the value of the approach and make it virtually certain that we should receive an unfavourable reply.

13. I would myself go further and express doubts of the wisdom of approaching the Americans at all with what amounts to a request for aid on an enormous scale. I do not believe that it is likely to produce any very significant result, as there seems little chance that the Americans will be prepared to ask Congress during the next three years for very largely increased appropriations for end item aid, and, since their principal concern is with the defence of Western Europe, it is very probable that they will prefer to supply aid to the European countries such as France which can provide man-power in great strength but have hitherto made little effort to equip it from their own resources.

14. I have therefore been wondering whether it would not be a wiser and more fruitful line of approach to ask the Americans to ensure that the United Kingdom receives the raw materials and the machine tools which it requires in order to carry out its announced defence programme and at the same time to maintain its exports and to increase its productivity sufficiently to maintain its standard of life during the rearmament period and to increase it gradually after the peak of that period had been passed. We might then at some later stage represent to the Americans the deficiencies with which we shall still be left after our programme has been completed, the impossibility of maintaining the production of armaments after the end of the three year period at a level sufficient to meet these deficiencies in a reasonable time, and the need for substantial end item equipment as a means of enabling this country to devote some of its resources at an early date to measures of social betterment and economic expansion.

15. In brief, the points on which I think the Cabinet should express an opinion are:

(a) Should we now approach the United States with a statement of the deficiencies in the equipment of our forces which will still remain when our own three year defence production programme has been completed? ineligible for end item aid and that the resultant deficiencies would thus fall wholly or largely upon the forces committed to N.A.T.O.

11. The proposed approach to the Americans has been based on the assumption that all we intend to ask for is end item aid to meet the deficiencies which will remain when our own £4,700 millions plan has been completed. Hitherto, there has been no suggestion that we should ask for aid in relief of our own defence production programme under the £4,700 millions rearmament plan. I understand, however, that the Chancellor of the Exchequer is of the opinion that, in view of the recent serious deterioration in our general economic position and particularly in the balance of payments, we should now consider whether we should not make some reference to the possibility, to put it no higher, that we may find ourselves compelled to reduce our own programme and to seek a greater amount of end item aid in consequence.

12. I am myself extremely doubtful whether it would be wise even to hint to the Americans at this stage that we may be contemplating a retreat from our declared intention to carry out our full rearmament plan as our appropriate contribution to the defence of N.A.T.O. and the whole free world. I fear that any suggestion of this kind would destroy the value of the approach and make it virtually certain that we should receive an unfavourable reply.

13. I would myself go further and express doubts of the wisdom of approaching the Americans at all with what amounts to a request for aid on an enormous scale. I do not believe that it is likely to produce any very significant result, as there seems little chance that the Americans will be prepared to ask Congress during the next three years for very largely increased appropriations for end item aid, and, since their principal concern is with the defence of Western Europe, it is very probable that they will prefer to supply aid to the European countries such as France which can provide man-power in great strength but have hitherto made little effort to equip it from their own resources.

14. I have therefore been wondering whether it would not be a wiser and more fruitful line of approach to ask the Americans to ensure that the United Kingdom receives the raw materials and the machine tools which it requires in order to carry out its announced defence programme and at the same time to maintain its exports and to increase its productivity sufficiently to maintain its standard of life during the rearmament period and to increase it gradually after the peak of that period had been passed. We might then at some later stage represent to the Americans the deficiencies with which we shall still be left after our programme has been completed, the impossibility of maintaining the production of armaments after the end of the three year period at a level sufficient to meet these deficiencies in a reasonable time, and the need for substantial end item equipment as a means of enabling this country to devote some of its resources at an early date to measures of social betterment and economic expansion.

15. In brief, the points on which I think the Cabinet should express an opinion are:

(a) Should we now approach the United States with a statement of the deficiencies in the equipment of our forces which will still remain when our own three year defence production programme has been completed? (b) Should we couple the statement with a request for assistance in meeting these deficiencies by greater amounts of end item aid than we have hitherto received?

(c) If so, should the underlying assumption be that we intend to complete our own defence production programme during the three years or should we suggest that we may for economic reasons be forced to reduce it and so become still more dependent upon American end item aid?

or (d) Should we at this stage confine our approach to the Americans to a request for adequate supplies of raw materials and machine tools in sufficient quantity to enable us to carry out our own defence production programme on time in order to ensure an increase in general productivity, deferring any request for greater quantities of end item aid until some later date except in respect of some items which are regarded as vital to the completion of our defence programme?

I prefer (d).

E.C.

Ministry of Defence, C.W.1.,

3RD SEPTEMBER, 1951. SECRET C.P. (51) 244 7th September, 1951

CABINET

LEGAL CONSEQUENCES OF EGYPTIAN ABROGATION OF THE 1936 TREATY

MEMORANDUM BY THE SECRETARY OF STATE FOR FOREIGN AFFAIRS

I circulate for my colleagues' information the following brief exposition of the legal position which will arise if Egypt unilaterally abrogates the Anglo-Egyptian treaty of 1936.

2. The 1936 Treaty contains no provisions for denunciation at any time. The Treaty, including the arrangements set forth in Article 8 for the stationing of British forces in the Canal Zone, was to last for 20 years, following which a revision might be negotiated at the instance of either party (that is, neither party could refuse to enter into negotiations), cf. Articles 8 and 16. If the parties failed to reach agreement on revision, then their differences were to be referred to the League of Nations for arbitration. The Treaty might, however, be revised by mutual consent at any time after 10 years from signature. Though it is not obligatory for either party to enter into negotiations for revision, we freely agreed to do so in 1946, as we are willing to do now; at the same time if such negotiations fail, we are not bound to go to arbitration.

3. For the Egyptians to denounce the Treaty unilaterally is therefore illegal. While it might be defensible for them to do so after the 20-year term in the absence of successful negotiations and the failure of arbitration, such denunciation before the 20-year limit is clearly indefensible.

4. If, therefore, the Egyptians denounce the Treaty now, it is reasonable for His Majesty's Government to ignore their action and continue to act at least until 1956 as though the Treaty was still in force. This is, of course, what we propose to do and must do, since the Treaty provides the only legal basis for our presence in Egypt at all.

5. I must, however, mention that His Majesty's Government are maintaining in the Canal Zone three or four times the number of troops which the Treaty of 1936 permits. Further, our strictly legal defence for this action would be somewhat specious and not very convincing. Though the Egyptian representative has recently taken this point in the Security Council, it has not been the ground on which Egypt has put her case up to now. Further, it would be difficult for Egypt to put her case on this ground because, as and when Egypt made this the foundation of her case, it would be legally open to His Majesty's Government to reduce the number of its troops in the Canal Zone to the Treaty limits and to contend that, as soon as this Egyptian demand was officially made, His Majesty's Government had, with all reasonable expedition, complied with it. For Egypt to take this line as the main ground of her abrogation of the Treaty would in addition be politically awkward for her, seeing that all Egyptian Governments throughout the period 1947 onwards have put their case on other grounds, and this ground would not appeal to political opinion in Egypt.

H. M.

Foreign Office, S.W. 1, 6th September, 1951.

41187 CABINET

LONG TERM FINANCIAL PROSPECTS OF THE BRITISH TRANSPORT COMMISSION

MEMORANDUM BY MINISTER OF TRANSPORT

At a Meeting of the Cabinet on 19th March, 1951, I was invited (C.M. 51, 21st Conclusions) to submit to my colleagues a Memorandum on the long term financial prospects of the British Transport Commission.

2. Annex A gives the net Book value as at 31st December, 1950, of the fixed assets of the various parts of the Commission’s undertaking and the gross and net operating receipts (before deducting interest and other central charges) derived from each branch of its activities for the year 1950. This clearly shows the predominating importance of British Railways which account for over 80 per cent. of the Commission’s fixed assets and over 60 per cent. of its gross receipts. London Transport accounts for a further 10 per cent. of the assets and gross revenue. The main features of London Transport, which has an established record of good management, are not likely to be modified substantially in the foreseeable future. It is clear, therefore, that unless some radical alteration takes place in the whole pattern of the Commission’s system its prosperity will depend mainly upon the financial results of the operation of the railways.

In relation to the net value of the fixed assets employed the highest net returns were earned by the Commission’s ships. Fair results were also obtained from the Road Passenger undertakings purchased by the Commission and still operated under a Company structure. Road Haulage during 1950 failed to meet its operating expenses by more than £1 million. This is disappointing, but the Road Haulage Executive was much engaged during 1950 in the difficult task of consolidating the very large number of undertakings (nearly 3,000 in total) acquired under the Transport Act, and substantially better results should be obtained in future. But clearly a small percentage variation up or down in railway receipts or expenses would outweigh in importance any corresponding variation which can be regarded as at all probable in the rest of the Commission’s undertaking.

It is to be noted that the gross receipts of the railways (after meeting a loss on collection and delivery services) exceeded their operating expenses by £234 million. They were thus not operated at an actual loss although their net revenue was insufficient to meet their due contribution to Central Charges which include interest on British Transport Stock.

3. The two aspects of the Commission’s undertaking which bulk largest in the public eye are the growing deficiency in its net revenue and the past and prospective increases in its charges.

The following figures show the Commission’s revenue deficiency for the three completed calendar years of its existence:

| Year ended 31st December | 1948 | 1949 | 1950 | |--------------------------|--------|--------|--------| | Net operating surplus (including “other income”) | £45,205,585 | £31,294,613 | £40,024,492 | | Less central charges | £49,938,409 | £52,055,846 | £54,107,804 | | Deficiency for year | £4,732,824 | £20,761,233 | £14,083,312 | | Deficit on Net Revenue Account as at 31st December | £4,732,824 | £25,494,057 | £39,577,369 |

41208 Having regard to the scale of the Commission's operations these figures are not yet unmanageably large; the disquieting feature about them is that so long as the costs of labour and materials continue to increase they will continue to grow and may well become formidable because the machinery provided in the Transport Act for effecting adjustments of charges is so slow in operation that a substantial deficit can be incurred between the time when an increase is justified by unavoidable rises in costs and the time when it can be authorised. The Commission point out in their Annual Report for 1950 that if the increases eventually made in their charges had been authorised earlier, the deficit of £14 million for the year might have been avoided altogether. Similarly, the figures for 1951 are already prejudiced by heavy losses during the early months due to a sudden and large increase in costs (including increased rates of pay costing about £20 million in a full year) which the Commission were unable to meet by an immediate increase in their charges. The position would have been a good deal worse had not the permanent members of the Transport Tribunal, whom (as required by the Transport Act) I consulted with regard to the most recent increase in charges which took effect in April, taken the responsibility of tendering me their advice without hearing objectors. Demands for increased pay and pensions by the Commission's staff are maturing at the present time and if and so far as they are acceded to a further accretion to the deficiency is to be expected pending an appropriate increase in their charges.

The lag between increases in expenses and increases in charges is of importance only during a period of generally rising costs which outweigh any economies which the Commission can reasonably be expected to achieve. It is primarily due, pending the coming into force of charges schemes, to the obligation imposed on me by the Act to consult the Transport Tribunal before I authorise an increase of charges by Regulations. In the case of the increases authorised last year delay also arose owing to Ministerial discussion of my proposals. On that occasion a period of over six months (4th October, 1949, to 27th April, 1950) elapsed between the Commission's application to me and the announcement of my decision. Of this period, the application was before the Tribunal from 28th November to 16th February, thirteen days being taken up by the public hearing of the Commission's case and of objections by interested bodies.

A protracted period of steeply rising costs was not contemplated when the Act was passed. It has resulted in two applications to me already for regulations authorising an increase of charges, and a third is only too likely in the near future to meet further increases in wages now under negotiation. In my view, the existing statutory procedure needs modification in two respects. Firstly, it should be made more speedy, and secondly the Minister of Transport (and through him the Government) should not be directly responsible for authorising increases. The Minister is in any case for practical purposes bound by the advice given by the members of the Tribunal. There is, I think, a strong case for amending legislation to authorise the Commission itself to raise its charges to meet substantial and unavoidable increases in its costs subject only to subsequent ratification by the Tribunal. The procedure would have to be worked out in detail, but what I have in mind is that subject to the presentation by the Commission to the Tribunal of its full case for an increase, it should be able to make the increase effective at once without prejudice to subsequent modification by the Tribunal. Such a procedure would provide a reasonable safeguard for the public, because the Commission would be anxious not to make increases which on examination proved to be unjustified, and would avoid the delay which, so long as present conditions last, must inevitably lead to a cumulative deficiency of net revenue. It would also avoid the political difficulties inherent in direct approval of increases by a Minister.

4. The Commission understandably feel somewhat aggrieved that increases in the cost of other commodities and services are accepted by the public with comparatively little complaint while increases in transport charges rendered inevitable by precisely similar causes arouse violent objection and lead to allegations of inefficiency. If, for instance, they had been able to raise their charges by the same percentage over pre-war as had taken place in the price of coal without going through any statutory procedure their financial difficulties would be at an end. One reason for the general reaction to increases of transport charges is no doubt the publicity involved in proceedings before the Transport Tribunal, where objectors are certain to suggest that the Commission ought to be able to effect large economies and to draw attention to the bad effects of the increases on the particular interest with which they are concerned. The increases in charges which have taken place on the main line railways since the beginning of the late war are given in Annex B.

5. As a commercial undertaking the Commission, if it is to maintain its financial position, must adjust its charges from time to time should this become necessary to meet unavoidable increases in its costs. There is no reason to suppose that such increases will be out of line with those which take place in other industries in similar circumstances or that with them the Commission would not be able to meet its financial obligations except to the extent of deficiencies due to the time lag between increases of costs and authorisation of charges necessary to meet them. These deficiencies can become cumulatively serious but they are not so yet and apart from them the financial position of the Commission does not at present give ground for alarm.

By the end of 1950 the Commission had used about £100 million of their liquid resources for capital purposes which they had power to finance by borrowing. Provided that they are allowed to exercise their borrowing powers by the issue of stock on the market to meet this and future capital expenditure, their cash resources should be sufficient for several years to provide for additional expenditure on arrears of maintenance and to meet further deficits of the same order as those that have already occurred.

6. The Commission, like any other commercial undertaking, can improve its financial position only by increasing its revenue or reducing its expenditure. It would not be unreasonable to hope for an increase of up to say £4 million per annum in the net receipts of the Road Haulage Executive. Until a Scheme covering the charges made by this Executive comes into force it has practically a free hand in adjusting its charges to its costs. It was not to be expected that this Executive would attain full efficiency while it was welding the nearly 3,000 separate undertakings of which it is composed into an operational whole.

No great increase in the total volume of railway freight traffic can be looked for. The total quantity of goods to be moved cannot be affected by any action on the Commission's part and the railways can only increase their share of it by attracting traffic away from other means of transport. This is no easy task and, so far as the traffic came from the Road Haulage Executive, little if any advantage to the Commission would accrue from it. The Railway Executive carried a larger tonnage of freight (by 0.4 per cent) in 1950 than in 1949. The Executive may reasonably be expected to hold their own, but although they will no doubt continue to do all they can to secure traffic it would be unrealistic to look for any substantial increase.

The tendency of passenger traffic, both in the Railway and the London Transport Executives, has been to fall. Gross receipts from passengers by the Railway Executive declined by over £7 million in 1950 as compared with 1949. The corresponding decline for London Transport (road and rail) was over £4 million notwithstanding certain increases in fares which came into force on 1st October, 1950.

The gross passenger receipts from provincial and Scottish road passenger services owned by the Commission increased from £35.5 million in 1949 to £38.4 million in 1950, or by 8.1 per cent., and the passenger journeys by 10.8 per cent. in England and Wales and 7.8 per cent. in Scotland, but at the same time the net traffic receipts showed a decline from £4.3 million to £3.4 million.

It is impossible to predict the future trends of passenger traffic and receipts because at any particular level of fares they depend to an appreciable extent on such uncertain factors as the habits of the travelling public, the amount of its free spending power, the number of private motor cars in use and even on occasion the weather. It would not be prudent to look for any significant increase in the Commission's net receipts from passenger traffic in the foreseeable future at any practicable level of charges. Passenger transport schemes under Part IV of the Transport Act if and when they materialise might add to the Commission's income in the future but not to such an extent as to alter materially the present picture.

7. The Commission regard it as necessary for the improvement of their financial position that there should be new bases of charge for their services which will take much greater account of the actual types and cost of service on the one hand and will also recognise that over a wide field the Commission's services are not a monopoly and that the ordinary principles of competitive business must be allowed a greater place in the fixing of charges in detail. There is undoubtedly force in this latter contention because in those fields where the Commission do not enjoy a monopoly it is possible for their competitors, who do not have to take the rough with the smooth, to undercut it in the case of the more attractive traffics. At the same time the Transport Tribunal are likely to look very closely at any charging powers of the Commission which would enable them with their large resources to put competitors out of business by charging unduly low rates over a period. A modernisation of their charges structure will doubtless be beneficial to the Commission’s revenue, and the Transport Tribunal, in considering schemes of charges by the Commission, will have to have regard to the Commission’s actual and necessary costs and the fulfilment of the obligations laid upon it by the Transport Act.

8. The Commission could have undoubtedly made its services for both passengers and goods more efficient and attractive if circumstances had been such as to allow it a free hand in capital investment. The Commission, not unnaturally perhaps, takes the view that it has received and is receiving less than its proper share of the national resources. In the short term increased capital investment would no doubt have some beneficial effect on its revenue. It would make it easier for the Commission to retain, on the railways, traffic which may otherwise be diverted to road transport and would doubtless lead to economies in operating costs and increases in efficiency. The effect of major increased capital investment in the long term is difficult to assess.

Electrification of lines with heavy traffic in the neighbourhood of large towns can yield very good results, as the recent electrification of the line from Liverpool Street to Shenfield has shown. The total cost of this scheme was about £8 million, and in the 11 months of 1950 for which figures are available loaded coaching train miles increased by some 33 per cent., passenger journeys by nearly 50 per cent., and passenger receipts by over 40 per cent. Electrification on a wider scale would have less certain results in improving net revenue, and would in any case be limited for some time to come owing to the demand which it would make on scarce national resources and the overall shortage of generating capacity.

09. As regards economies, so long as the physical shape of the Commission’s transport system remains more or less as it is at present economies on a major scale are not to be expected. There is no doubt that the Commission and the Railway Executive are fully alive to the need to effect all practicable economies and they are entitled to claim a fair measure of success in spite of the difficulties which, in common with other sectors of industry, they have had to face. A general indication of this is afforded by the fact that with a general level of charges of 8½ per cent. and 5½ per cent. over pre-war for goods and passenger traffic respectively the Commission was towards the end of 1950 in approximate financial equilibrium. A particular indication is that between 1st January, 1948, when the Commission took over the railways and the end of 1950 the total working expenses per train mile, adjusted throughout to end-1950 prices, had fallen by 25%, equivalent to a saving of £35 to £40 million a year on the output of train miles at the end of 1950. The consolidation of the undertaking of the Road Haulage Executive, together with economies from improvements in organisation and equipment of the Commission’s undertaking generally should show results year by year, although possibly on a diminishing scale. There is, however, widespread opposition by the public whenever proposals are made to close branch lines or to make even quite small changes in the services offered. The Commission is, moreover, faced with reluctance on the part of the staffs of the Executives to depart from traditional organisational structures or methods of working. In its last Annual Report the Commission refers to the necessity for a greater willingness to accept changes, whether in conditions of work or in types of service or in proposals to integrate the Commission’s services and to avoid costly delaying action on each proposal for reorganisation. The recent successful unofficial strike by large numbers of drivers in the Road Haulage Executive against the extension of the employment of Inspectors on the road, the objection of drivers of heavy vehicles generally to an increase in the maximum speed of these vehicles from 20 to 30 miles an hour and threatened trouble as soon as economic transfers of traffic from rail to road or vice versa are proposed are cases in point.

10. A good deal has been said, both during the passage of the Transport Act through Parliament and since, on the possibility of effecting major economies through integration, and the Act in fact lays upon the Commission the duty of providing a properly integrated system of transport. "Integration" is in itself a term which would cover a wide variety of modifications in organisation, from working arrangements between the Executive for the handling of traffic, to a radical modification of the whole transport system.

The Commission, after consulting the Trades Unions, have produced a Statement of Policy on the integration of freight services by road and rail which specified the traffics for which each is specially suitable and efficient and lays down lines of co-operation between the two Executives concerned.

This, so far as it goes, is on the right lines, but to my mind a bolder and more positive approach to this problem is needed. It may be that the possibilities of integration in the wider sense are limited, but it would be rather extraordinary if the railways, which assumed their present shape in the nineteenth century, plus the largely unrelated growth of road transport, have achieved the right balance between the two which is essential to a fully integrated system.

The primary question which to my mind needs an answer is what part should be played by the railways in a fully integrated system having regard to all the means of transport and techniques of handling goods and passengers now available or likely to be so in the foreseeable future. The comparatively expensive and rigid equipment of the railways makes them the solid foundation on which to build. Whatever the right answer, road transport can easily be adjusted to it. Its main assets are shortlived and can be expanded or contracted over a comparatively brief period of years without excessive financial loss. Until this fundamental issue is cleared it is hardly possible for the country to have a coherent transport policy. If the railway system ought, in the general interests of transport economy, to be substantially contracted we should spend less money on the railways and more on the highway system. If it turns out on inquiry that the relative proportions of rail and of road transport equipment are about right so much the better. But until there is a clear picture of the ultimate pattern of the transport system of the country our transport policy, as a whole will be liable to drift and capital investment in transport to be devoid of firm guiding principles.

If we had this clear picture many subsidiary but important questions would fall into their proper place. The railways would be able to proceed much more rapidly and extensively with the closing of branch lines (if this is the right ultimate policy), the transport requirements of trade, industry, agriculture and markets could be progressively related to a known pattern and the railways might be able to secure additional financial resources by the disposal of land or other property if it proved to be surplus to the requirements of a fully integrated system.

11. I do not think that the comprehensive inquiry which would be necessary to explore and establish the facts and possibilities on which a national transport policy could be built could properly be undertaken by the Commission. Not only is it faced with an immense task in the day to day administration of its vast undertaking, and preoccupied with railway finances and its relations with labour, but the scope of the inquiry would far transcend the Commission's range of activities. The Commission is concerned with only a small, although very important, fraction of road transport, and is not directly interested in the economics of the highway system. Moreover, the great bulk of its expert staff, to say nothing of its workpeople, are bound to favour strongly the particular form of transport with which they have been associated during their working lives.

In my view it is imperative that this task should be put in hand without delay. Having regard to its magnitude and importance and of the necessity that those undertaking it should have the fullest access to all available facts, I do not think that it could be undertaken by any body short of a Royal Commission.

12. The question of a subsidy to the Commission has been frequently raised. It would I think, be a most unwise step to make any kind of annual subsidy to the Commission for the purpose of reducing its charge, whether for passengers or goods. There is no reason why users of the Commission's services should not pay for them what they cost to provide, including the moderate remuneration provided in the Transport Act for the capital employed. The machinery of the Transport Act should be sufficient to see that these charges are fair to the public and fairly distributed over the different types of user. The defects of this machinery during a period of steeply rising costs do not destroy its value and effectiveness for more normal times. A revenue subsidy would, moreover, diminish the pressure on the Commission and its Executives to make financial ends meet by their own efforts, and would certainly do nothing to discourage demands by the Commission's personnel for higher wages and improved conditions of service. The accumulated deficiency of net revenue is not yet so large as to be unmanageable over a period of years without any serious impact on charges. A case could, possibly, be made for a subsidy to cover the accumulated deficiency of net revenue when costs have become stabilised. It would, I think, be unwise to consider a subsidy earlier to liquidate the deficiency in net revenue because it might set up a precedent for an annual contribution until comparative stabilisation of costs is reached.

A capital subsidy would hardly be justified. So long as the Commission can borrow at reasonable rates it would have to be a very large subsidy to give material relief to the revenue position.

13. Briefly, therefore: —

(a) The accumulated revenue deficiency of the Commission is not, so far, of unmanageable size and is due primarily to the lag between unavoidable increases in the Commission's costs and the authorisation of increased charges necessary to meet them. The Commission's finances are not, in fact, moving towards disaster.

(b) This lag and the consequential deficiencies in revenue arising from it are due to the procedure laid down in the Transport Act for controlling the Commission's charges. Legislation should be introduced to enable the Commission to adjust their charges subject to subsequent ratification by the Tribunal.

(c) Although progressive economies are to be expected these are not likely to be of such a character as to modify substantially the financial position of the Commission or materially to affect the level of its charges.

(d) Provided that the Commission are enabled to adjust their charges to their necessary expenses as is done in trade and industry generally, there is no reason why they should not attain and maintain financial equilibrium as soon as prices become more stable.

(e) There may possibly be a field for substantial economies in a radical modification of the transport system. An examination of this very large and intricate problem should be undertaken by a Royal Commission.

(f) There is no strong case for a Government subsidy to the Commission at present.

A. B.

Ministry of Transport, W. 1, 10th September, 1951.

### ANNEX A

**Net Book Value of Fixed Assets, Gross and Net Operating Receipts**

| | Net book value of fixed assets as at 31st Dec., 1950 | Gross receipts (operating) 1950 | Net operating receipts (before deducting central charges) 1950 | |----------------------|-----------------------------------------------------|---------------------------------|---------------------------------------------------------------| | | £ | £ | £ | | British Railways (including collection and delivery and other road services) | 1,138,823,974 | 349,630,770 | 23,554,671 | | *Road Haulage (British road services)* | 38,227,141 | 62,473,177 | 1,108,476 (Deficit) | | *Road Passenger Services: Provincial and Scottish* | 35,357,261 | 38,673,331 | 3,389,685 | | **London Transport Road Passenger Services** | | | | | Buses and coaches | 23,749,280 | 30,788,755 | 1,904,649 | | Trolleybuses | 4,540,589 | 8,169,350 | 438,683 | | Trams | 3,295,319 | 2,559,984 | 1,254,172 (Deficit) | | **London Transport Railways** | 104,244,448 | 15,032,594 | 659,411 | | Ships | 7,857,521 | 11,412,052 | 2,850,010 | | Inland Waterways: Carrying operations | 311,336 | 693,638 | 93,795 (Deficit) | | Inland Waterways: Other than carrying operations | 68,503,916 | 12,497,706 | 54,847 | | **Hotels and catering** | 23,501,433 | 1,589,834 | 154,129 | | **Commercial advertising** | 9,155,738 | 14,770,936 | 612,696 | | **Letting of sites, shops, &c., on premises and properties in use for transport purposes** | | | | | **Generation and distribution of electric current** | 14,045,780 | | | | **Land and buildings not in use for transport purposes** | 34,076,983 | | | | **Miscellaneous** | 40,048 | | | | **Total** | 1,505,730,767 | | | | **Deduct—Assets Displacement Account** | 164,370,613 | | | | **Net Total** | 1,341,360,154 | | |

- Excludes £60,279,546 goodwill. This amount is shown in the balance sheet and covers—
  1. an estimate of the amounts payable for compensation for cessation of business and severance in respect of road haulage undertakings compulsorily acquired. It may be a considerable time before the amounts payable under these heads are finally ascertained;
  2. amounts included for goodwill in the consideration (partly estimated) for road passenger and road haulage undertakings acquired by agreement or in the price paid for shares in such undertakings;
  3. amounts included for goodwill in the valuations put upon interests in road passenger and road haulage companies transferred from vested undertakings.

### ANNEX B

**Main Lines' Increases in Charges**

| Percentage level over pre-war to which raised | From 1st May, 1940 | From 1st Dec., 1940 | From 1st July, 1946 | From 1st Oct., 1947 | From 15th May, 1950 | From 16th April, 1951 | |-----------------------------------------------|-------------------|-------------------|-------------------|-------------------|-------------------|-------------------| | Fares (other than workmen's and seasons) | 10 | 16½ | 33½ | 55 | 55 | 55 | | Workmen's fares and season ticket rates | 10 | 10 | 25 | 55 | 55 | 55 | | Charges for parcels and miscellaneous traffic by passenger train | 10 | 16½ | 33½ | 55 | 81 (approx.) | 99 (approx.) | | Charges for goods train traffic | 10 | 16½ | 25 | 55 | 81 (approx.) | 99 (approx.) | CABINET

THE COAL TRANSPORT SITUATION

Memorandum by the Minister of Fuel and Power

The memorandum by the Minister of Transport (C.P. (51) 237) reveals a most disturbing prospect. With the present shortage of man-power on the railways, it seems more than likely that the transport facilities of the country will be unable to move the whole of the coal output. Indeed, a shortage of wagons at the pits is already appearing. Since the resumption of Saturday working, certain pits in the East and West Midlands and in Scotland have only had sufficient wagons at the beginning of the day to cover the requirements of the morning shift, and, in one or two cases, not even that.

2. In view of the difficulties experienced last winter - difficulties which continued, contrary to all previous experience, through the spring and into the summer - and of repeated warnings by the railways that the position, short of remedial action, would worsen during the coming autumn and winter, arrangements were made some time ago to increase the transport of coal by road, canal and sea. But I am afraid they will be nothing more than a palliative; the bulk of the coal must be carried by rail, and the root problem of ensuring sufficient rail transport remains.

3. Although I have not received all the material needed for drawing up next winter's coal budget, it is already clear that we shall have difficulty both in meeting essential requirements at home and in maintaining exports at the level laid down by the Production Committee earlier in the year. We shall also have acute difficulty in providing the large coal required by the gas works and to the domestic consumer; the stocks of these consumers are now well below the target level.

4. It follows that, if a major breakdown in distribution affecting both industry and the domestic consumer is to be avoided, rail transport facilities must be such as to ensure that all the coal produced is moved promptly to its destination.

5. The effect of a shortage of transport on the miner himself must not be overlooked. It would be disastrous if the men were to find, in responding to the appeals which have been made to them for more output, that coal had to be placed on the ground, or, worse still, that pits were brought to a stop for want of transport for the coal.

6. By co-operation between the Railway Executive and the National Coal Board much has been done not only to transfer traffic from rail to other forms of transport but also to reduce the burden on the railways by the re-routing of traffic, by the make-up of through trains (so as to avoid marshalling and shunting at congested junctions). But, as the Minister of Transport indicates in C.P. (51) 237, this will not be enough, and indeed the National Coal Board have been clearly warned by the Railway Executive, with whom they are in daily contact on these matters, that even when all these steps have been taken they think it unlikely, unless the staff position is improved, that the railways will be able to carry the usual proportion of the coal output.

7. I am, therefore, alarmed by the Minister of Transport's statement in paragraph 4 of C.P. (51) 237 that there is no reason to expect any improvement in ratio of staff recruitment to wastage during the autumn and winter when working conditions worsen. In the light of this and the other considerations I have given, I have no alternative but to urge my colleagues to support the Minister of Transport in taking whatever measures will effectively increase the man-power on the railways during the coming winter months.

P.J. N-3.

Ministry of Fuel and Power, S.W.1.,

13TH SEPTEMBER, 1951. Interdepartmental discussions between the Ministry of Labour and National Service, the Home Office, the Scottish Home Department and other Departments have been taking place for some months about the whole-time man-power which would be required in war for the Rescue and Pioneer Sections of the Civil Defence Corps, and for the Fire Service (additional to the peace-time strength of the Fire Brigades). These discussions have now reached a point where guidance on broad policy is required from Ministers.

2. The requirements of whole-time man-power are roughly estimated by the Home Office and Scottish Home Department at 200,000 men in the case of the Rescue and Pioneer Sections of the Civil Defence Corps and 175,000 men in the case of the Fire Service. These figures do not purport to be precise estimates and, in any case, the actual figures would depend, among other things, on factors which are at present uncertain, e.g., on the date when the men will be required and the equipment which could be made available for them by that date. For planning purposes, however, they are regarded as reasonable estimates of the order of magnitude of the man-power required.

3. To meet these requirements, the Civil Defence Services have no trained reserves corresponding to either the Regular Reserves of the Armed Forces (including National Servicemen), the Territorial Army and other Volunteer Reserve and Auxiliary Forces, or to Class 'Z' and equivalent Reserves. Recruitment for Civil Defence and the Fire Service is at present proceeding on the basis of part-time commitments both in war and in peace, and the number of men enrolled, even on this basis, is only some 15,000 in the case of the Rescue and Pioneer Sections of the Civil Defence Corps and some 7,500 in the case of the Auxiliary Fire Service.

4. Obviously, the ideal plan from the point of view of the Home Office and Scottish Home Department would be to fix a target date by which an agreed number of trained men should be available for call-up on the same basis as the Reserves of the Armed Forces. To achieve this object in any reasonable time or on the basis of anything like the figures indicated in paragraph 2 would be wholly impracticable within the framework of current Defence policy and even to build up Reserves on a smaller scale and on a lower standard of training would necessitate a great intensification of effort in the way of provision of facilities for training in peace-time. It is no part of the purpose of this paper to suggest any revision of decisions recently taken by the Cabinet as to the scale on which Civil Defence preparations should proceed, and it is recognised by the Home Office and Scottish Home Department that it is their responsibility to develop their organisation for the purpose of providing Civil Defence and Fire Service Reserves within the limits of policy as it stands.

5. It would, however, be unrealistic and uneconomical to embark upon plans for expanding existing training facilities in order to cater for the intake and training of large numbers of Reservists unless preparations are made at the same time to ensure that, at the opportune time, there should be a flow of recruits at a rate proportionate to the capacity of the facilities thus provided. It is, therefore, essential at an early stage that concurrent examination should be made of this problem.

6. It is highly desirable on every ground that the numbers required should be obtained on a voluntary basis, and it is agreed that the Home Office and Scottish Home Department should, as soon as they are ready (i.e., when they are in a position to give, at any rate broadly, an indication to volunteers of what would be their conditions of service in war), launch and press with the utmost vigour a campaign designed to secure both from those who have already enrolled on a part-time basis, and from other sources, as many volunteers for whole-time service in war as possible. There is, however, nothing in past experience to justify the hope that anything like sufficient numbers are likely to be obtainable in this way, or that those obtainable will be obtainable at the right times or in the right places. There can be no doubt that the only way of obtaining satisfactory results would be by the introduction of a measure of compulsion in peace-time and the Cabinet are invited to consider whether provisional preparations for doing so should now be made or whether we must accept the inescapable alternative that these Services will not be adequately manned at the outbreak of war. The details of any measure of compulsion would require careful study. Its main objective should be to secure that an appropriate number of men are registered in a Reserve with obligations of immediate call-up in the event of war in the same way as in the case of the Armed Forces; the actual numbers to be called up would be regulated according to the facilities available for handling them. The two main questions which would arise are:

(a) what classes or groups of men should be made liable for compulsory enrolment; and

(b) what, if any, liability for training in peace-time should be imposed upon them?

Both these are questions which need further examination in detail, but broadly it is contemplated that this examination should be based on the following principles:

(a) Without excluding the possibility of obtaining a proportion of the requirements either by way of a percentage of the annual intakes of National Servicemen or by imposing obligations upon older men who had experience of civil defence or fire service in the last war, main reliance should be placed upon the call-up of young men in their age groups, starting at age 25 and excluding from the field Regular Reservists (including National Servicemen during their period of part-time service), members of the Territorial Army and other Volunteer Reserves and Auxiliary Forces, "Z" Reservists selected and available for recall, and men who ought to be reserved for Industry; the obligation in war would be to serve in Civil Defence for a limited period, until they were required and could be made available for call-up to the Armed Forces, which meanwhile would have sole call upon men up to age 25.

(b) There should be a limited period of annual training; it would not be possible to fix this so high as to provide that all Reservists were fully trained in peace-time (it is estimated that for this purpose a period of continuous training of six weeks would be required), but consideration should be given to the possibility of varying training periods for different parts of the country, designed, e.g., to secure that special provision could be made for the case of London.

7. The Minister of Labour and National Service is in general agreement with this paper.

8. The Cabinet is accordingly invited -

(i) to note that without compulsory enrolment and training in peace-time the Civil Defence Services cannot be ready to operate at the outbreak of a war; and

(ii) to decide whether a Bill should be prepared to confer the powers necessary for the purposes indicated in paragraph 6, on the understanding that it would be held in reserve until a decision can be taken on the practicability of introducing compulsion in peace-time.

J. G. E. H McN

14TH SEPTEMBER, 1951. MAN-POWER REQUIREMENTS OF THE POLICE AT THE OUTSET OF ANY MAJOR WAR

Memorandum by the Home Secretary and the Secretary of State for Scotland

This paper, prepared in consultation with the Ministry of Labour, is complementary to our paper setting out the needs of the Civil Defence Services for trained men required for whole-time service from the outset of a major war.

2. In order to discharge the additional war-time tasks which fall to the police, it is estimated that police forces will require an increase of 50% over their peace-time establishment of approximately 80,000 men; the war-time male police establishment has therefore been fixed at 120,000. The present male strength of police forces in England, Wales and Scotland is approximately 67,800 but account must be taken of the numbers of reservists of the Armed Forces in the police who will be required to return to the Fighting Services on the outbreak of war. The numbers of men required to bring the police up to full strength in war fluctuates according to current police strength, and the numbers of reservists, but it is of the order of 55,000 to 60,000. In addition 1,000 women will be required for full-time police duty.

3. As regards part-time man-power, it is considered that it will not be necessary to expand the peace-time cadre of the Special Constabulary; the maximum strength authorised for the Special Constabulary in peace-time is approximately 160,000. The present strength of the Special Constabulary in Great Britain is 76,000, so that the police would need to recruit a further 84,000 Special Constables in order to reach their maximum peace-time strength. In addition there would be a need for a small number of women Special Constables.

4. During the last war a certain number of conscripts elected to serve in the police. The experiment was not altogether a happy one and showed that, although some conscripts exercised police powers satisfactorily, as a general rule it was undesirable to entrust to conscripts the extensive powers affecting the general public which appointment as a policeman confers. Apart from this, policemen work very largely as individuals and must be trusted to do their jobs honestly and conscientiously: an unwilling conscript would be virtually useless. In the circumstances, the measures proposed to recruit men for the Civil Defence Corps and the Fire Service by means of conscription should not, it is felt, be extended to the police service in peace-time, even though conscription for the police in war-time might have to be considered as a last resort.

5. It appears therefore that for the time being reliance should continue to be placed on the volunteer system to obtain the additional man-power required for the police. In view of the presumed nature of a future war, it is desirable to obtain and train such volunteers prior to active hostilities; apart from the Civil Defence considerations which make this necessary for the Civil Defence Corps and the Fire Service, the police have in addition to their Civil Defence tasks special responsibilities at the beginning of war, such as the control of aliens. The existing training facilities are estimated to be capable of training all volunteers likely to be forthcoming.

6. In order to stimulate voluntary recruitment, it is desirable to place the minimum restrictions both on candidates for the Special Constabulary and on men prepared to give full-time service in war. Prior to the Defence Committee's decision of 27th July, 1949 (D.O. (49) 18th Meeting, Minute 3) there was no restriction on the recruitment of Special Constables other than a minimum age limit of 18 and the necessity for a candidate satisfying the necessary standards as to height, fitness, integrity, nationality and education. In view of the complete reliance which must be placed on voluntary recruitment for the police it is desirable that any suitable (on pre-July 1949 standards) volunteer, either for part-time service or full-time duty, should be permitted to enrol, provided that the candidate is neither a reservist whom the Service Departments require for mobilisation in the early months of an emergency, nor engaged in a full-time civilian calling essential to the war effort.

7. The following proposals are therefore put forward for the field of recruitment for men prepared to undertake full-time police service in war:

(i) Men between 25 and 50, other than those in the Armed Forces or the Territorial or Auxiliary Forces, including the National Service Reserve, or those in vital occupations;

(ii) "Z" or equivalent reservists, other than those selected for early recall by the Service Departments or in vital occupations;

(iii) Retired Officers recruited with the prior approval of the appropriate Service Department.

8. The field for recruitment for part-time service in the Special Constabulary should be similar, except that a vital civilian occupation would not debar "spare time" service as a Special Constable.

J. GE. H McN

14TH SEPTEMBER, 1951. THE MAN-POWER POSITION ON THE BRITISH RAILWAYS

Memorandum by the Minister of Labour and National Service

In his paper (C.P. (51) 237), the Minister of Transport asks that further consideration should be given to the request for the deferment of the calling-up of about 2,900 young railwaymen. This is the same proposal that he put forward originally in his paper (C.P. (51) 215), and which the Cabinet decided against as recently as 26th July (C.M. (51) 55th Conclusions, Minute 5). I am still strongly of the opinion that it is undesirable to defer the calling-up of railway workers and I can find nothing in the Minister of Transport's new paper which was not in substance before the Cabinet when this question was considered.

I should like to recapitulate very briefly the main arguments in my earlier paper. These were as follows:

1. It is only by the maintenance of the principle that the obligation to perform national service in peace time is of almost universal application that we can hope to continue to have general public support for the policy;

2. If a breach in the almost universal application of national service were allowed in favour of the railways, how could we refuse to grant applications for the deferment of calling-up of young men in other important industries and services which are also short of labour? Despite the fact that it must have become well-known that deferment on industrial grounds will not be granted, my Department has, since the beginning of 1950, received representations for the deferment of young men in nearly twenty industries or sections of industries. In particular, if deferment were granted to relatively unskilled men of 18 on the railways, how could it be refused to young men in, for example, the engineering industry who have become skilled on completing lengthy apprenticeships at about the age of 21 and are employed on very important work connected, for example, with rearmament? Apart, therefore, from the serious danger that if deferment were once granted on any scale it might be difficult to maintain national service at all, the effect on the numbers of men available to meet the needs of the Armed Forces might be very serious. Despite the removal of the agricultural blanket and the acceptance by the Services of some men in medical categories III and IV, we expect to be about 17,000 short of the numbers of national servicemen the Services need during the current financial year, and I suggest that we dare not run the risk of being substantially shorter still. If deferment were once granted on any scale, we shall find ourselves having to adopt the very unpopular course of imposing a still longer period of whole-time national service on the young men who were called up.

3. If a decision were taken to grant deferment to railwaymen, or to other workers such, for example, as draughtsmen, it would be wrong to do it on the basis of 'block' deferment of a whole grade of workers in an industry. The only method that would be fair to the individual and at the same time in the national interest would be to give all employers the opportunity to apply for deferment in respect of their employees on the grounds of the importance of the work to the national effort. This would have two results. In the first place, it would require the resuscitation of the war-time machinery of deferment involving the re-establishment of the Man-Power Boards, of which there were forty-four during the war. Secondly, it would mean that there would be a most serious shortage of national servicemen for the Forces. This could only be made good by a substantial extension of the period of national service.

4. I ask my colleagues to re-affirm the decision they took on 26th July.

A. R.

Ministry of Labour and National Service, S. W. 1.,

17TH SEPTEMBER, 1951. CABINET

BAMANGWATO AFFAIRS: TSHEKEDI KHAMA

MEMORANDUM BY THE PARLIAMENTARY UNDER-SECRETARY OF STATE FOR COMMONWEALTH RELATIONS

The three observers sent to Bechuanaland (C.M. (51) 51st Conclusions, Minute 3) have now reported, and Mr. Gordon Walker regrets that he must trouble his colleagues again with the question of the Khamas and the Bamangwato Reserve. As usual, there are some very awkward aspects of the question to decide, though the main issue is simple enough. The main question for decision, as Mr. Gordon Walker sees it, is in Section B of this memorandum. In Section A, I give the main developments since this matter was last considered by the Cabinet.

A.—Recent Developments

2. Despite one unseemly quarrel in public the observers have sent in clear, and on the whole, useful reports (Annexes B and C).

3. Mr. Bullock and Professor Macmillan have put in a joint report. They explain very clearly why it is impossible for Tshekedi to return as a private citizen (Annex B, paragraph 33). It is not so much, they say, a question of Tshekedi's ambition or honesty as of his status as the senior man in the tribe whilst Seretse is away. So strong is the sense of hereditary hierarchy that he would in fact be leader of the tribe. Mr. Bullock and Professor Macmillan say that memories of Tshekedi's high-handed acts are still vivid. The great majority of the tribe do not want Tshekedi back because he would rule over them and they fear the reactions of his authority.

4. It was largely for this reason that the present tribal leaders refused to agree to a joint kgotla. They said that Tshekedi had voluntarily withdrawn himself and joined another tribe. Were he now to be admitted to a kgotla this would automatically mark his reincorporation into the tribe and from that moment his hereditary authority, of which he cannot divest himself, would come into force.

5. On 11th August the observers reported to the Secretary of State their failure to get a joint kgotla and unanimously recommended that he should abandon this idea and let them assess the views of the tribe about Tshekedi's return by means of local kgotlas in every part of the tribal territory. On the 13th the Secretary of State accepted this recommendation and agreed that endeavours to hold a joint kgotla must be abandoned.

6. The one issue before the observers was to report on the attitude of the tribe towards the question of Tshekedi's return to the Reserve in a private capacity. On this issue they give a clear answer:

(a) Mr. Bullock and Professor Macmillan say—

"On this one question we have no hesitation in declaring that the return of Tshekedi Khama in any capacity whatsoever at the present time and in the present circumstances would be contrary to the wishes of the majority of the tribe and bitterly resented by a substantial number. On this issue emotions now run dangerously high through the tribe."

(Annex B, paragraph 31.)

(b) Mr. Lipson, in a separate report, is less unqualified but comes to essentially the same conclusion (Annex C, paragraphs 20 and 21). In effect he says... that the feeling against Tshekedi is not as tense as it appears because there was intimidation by his opponents, who are now in control of the tribe. Had Tshekedi attended a joint kgotla he might have influenced many to change over to his side. Mr. Lipson puts it as follows: "My own view is that, in spite of all that Tshekedi could have done, there would still have been a substantial majority against his return, so long as Seretse remained in exile. The chief fear of very many of those who were opposed to Tshekedi's return would probably be removed had Seretse also been allowed to return. They would, for the most part, acquiesce in his return, if Seretse were back in the tribe as chief and agreed that Tshekedi might rejoin the Bamangwato. Meanwhile, conditions in the tribe are deteriorating owing to lack of strong leadership."

It will be seen that in the first few lines of this passage Mr. Lipson's views on the question put to the observers are clear; but he has felt it necessary to introduce the question of Seretse's return, which was outside his terms of reference.

7. In private conversation Mr. Lipson told the Secretary of State that he thought we ought to take the risk (which he agreed was very considerable) of letting Seretse and Tshekedi Khama back. It is quite possible that he may say something like this in public. Mr. Bullock and Professor Macmillan were, on the other hand, quite clear that it would be a mistake to allow either of them back. On the issue on which they were asked to report the observers have given a clear verdict which justifies the Government in continuing to maintain the exclusion of Tshekedi from the Reserve.

B.—The Issue

08. The Secretary of State is under an obligation, given in Parliament, to publish the observers' reports. They must be accompanied by some statement or reaffirmation of Government policy—the situation in the Reserve in itself demands this. Mr. Gordon Walker therefore wishes to remind his colleagues of the considerations which had to be taken into account when the previous decision was taken and which in his opinion are still as strong.

09. The Secretary of State considers that, if the internal situation in the Reserve could be looked at in isolation, it would be a fair point that we could make the tribe happy if we let both Seretse and Tshekedi Khama back. They might fall out in due course and the fact that Seretse had a white wife and half-caste children would be used against him in any dissensions that might arise and would weaken his authority. In the end tensions and divisions might well become grave. However, in the short run the tribe would doubtless be happy.

10. There is also the consideration of public opinion here. Certainly the issue has become one of which the public is aware, but there is no evidence that there is any widespread public concern. For instance, since Tshekedi started his campaign in June Mr. Gordon Walker has received, either direct or through MPs., letters from only forty persons about this issue—a good many of these came from one or two places where Tshekedi spoke and someone obviously organised a letter-writing campaign.

11. Despite the apparent absence of widespread public concern at present, it has, however, now become such a celebrated cause that it could build up again into a big issue at any time. Tshekedi Khama has announced his intention of returning to England to pursue his campaign against the exclusion order against him. He said recently at the conclusion of the observers' visit—"This is not the end. It is only the beginning." But he will probably postpone his visit to this country in view of the general election. This is also likely to crowd out or postpone any real volume of criticism. In any case Mr. Gordon Walker doubts whether the Conservatives will again try to make capital out of the Tshekedi question. They are divided and many of them have, Mr. Gordon Walker thinks, been impressed by the warnings given by Mr. Strauss, the leader of the Opposition in the Union Parliament on his recent visit to England, and by Sir Evelyn Baring. They will probably also be deterred by the realisation that it is hard to separate the issues of Tshekedi Khama and Seretse Khama.

12. The Secretary of State has carefully considered whether it would be possible to let Tshekedi go back while maintaining the exclusion of Seretse. They have both been excluded, but a distinction can be drawn between their cases. Seretse was excluded on account of a specific act of his own which could be regarded as unfitting him for the chieftainship. Tshekedi, on the other hand, was not excluded on account of any blameworthy action of his own but because, if Seretse was to be excluded, fairness—and perhaps the maintenance of order—required that Tshekedi should not remain in the Reserve. If we let Tshekedi back now, there would certainly be disorders at first in the Reserve, but Tshekedi might thereafter succeed in asserting his authority. On the other hand, the disorders in the Reserve might be serious. Tshekedi himself has said to Protectorate chiefs that, if he is allowed to return to the Reserve, he would work for Seretse's return. In order to maintain his position in the Reserve, he would probably have to press the Government for Seretse's return, even though he might otherwise be reluctant to do so. In these circumstances the pressure of public opinion outside Parliament in favour of Seretse's return would be very strong. We have always grounded our policy on the need to exclude both from the Reserve, and it would be difficult for us to sustain the case for keeping out Seretse if we let Tshekedi back, unless we were prepared to confess that we were yielding to fear of South African reactions. Moreover, we should be overriding what the observers regard as the views of a substantial majority of the tribe. The Commonwealth Secretary believes that we should ultimately be forced to allow Seretse back if we once allowed Tshekedi in and in the last resort he would prefer to go the whole hog and let Seretse back simultaneously rather than be pushed along reluctantly to allow him back in the end.

13. Therefore in practical terms the question is whether to let both Seretse and Tshekedi back or to continue to keep both of them out. The issue for the present is whether Tshekedi and Seretse be excluded now. When, however, the White Paper period ends in 1955, Mr. Gordon Walker thinks that, in view of the distinction between their cases to which I have referred, it is conceivable that Tshekedi might then be allowed to return. He sees no possibility of Seretse Khama being allowed to return then.

14. The Commonwealth Secretary wishes to emphasise that, apart from the possibility of future trouble in the tribe if we let both go back, we have to consider the reactions of South Africa. We must never forget that these Territories are geographically and economically part of the Union.

All the evidence that Mr. Gordon Walker can get shows that Union reactions to Seretse's return would be very sharp and serious. (They do not mind one way or the other about Tshekedi.) This is borne out by Mr. Strauss, the leader of the United Party, who says that he could not oppose any course of action that Dr. Malan might take and that we must choose between Seretse's return and keeping South Africa in the Commonwealth. It is borne out by Mr. Paver, a progressive South African who runs the African vernacular press there and with whom Mr. Gordon Walker has had several talks. It is borne out by Sir Evelyn Baring. Finally, the United States Embassy in South Africa is understood to have made similar reports to Washington.

All these authorities say that white opinion in the Union would be so incensed by what they would regard as the official blessing of the British Government upon the principle of mixed marriage that it would unite behind a Government that was ready to take extreme action. We could no longer rely upon South Africa being actuated by rational motives; nor upon the political divisions that now prevent the Nationalists from pushing their views too far.

15. There are two sets of action that could be taken by a South African Government to our disadvantage:

(a) They might cease to co-operate in defence. They would certainly press on with demands for the cession of Simonstown. We could not count on their ready co-operation in economic and financial matters.

(b) They could make it virtually impossible for us to continue to administer the Territories. One of Dr. Malan's chief advisers has told us that Malan has said he would "blockade" the Territories if we let Seretse back. Dr. Malan did not say this for our information and does not know that we have been so informed. If South Africa were prepared to face economic disadvantages to herself she could cut off the Territories from essential goods and from their markets. She could also gravely reduce their already inadequate revenues. Whether or not South Africa would go so far as this, she would certainly very soon come forward with strong demands for the cession of the Territories, perhaps after fighting an election on the issue. 16. If we decided to reverse our policy about Seretse and Tshekedi, we would first have to make a careful study of how we should deal with an economic blockade of the Territories. There is, Mr. Gordon Walker thinks, little we could do—and even that would depend upon our spending very considerable sums of money, all of which might well be wasted. There would be a deplorable public conflict between ourselves and another Member of the Commonwealth which would be made full use of by every ill-wisher of the free world with incalculable results.

17. In any case (leaving aside the defence aspect) it seems to Mr. Gordon Walker that, if we let Seretse back, we should be running a high risk of losing the three Territories. This would, incidentally, profit Seretse not at all. For the sake of the not altogether undoubted rights of two men, we should be risking the liberties of nearly a million Africans. In the Secretary of State's considered view these risks are too great for us to run.

18. The Secretary of State therefore concludes in the light of all these considerations that he must recommend to his colleagues that the right course is to reaffirm the Government's policy as set out in the original White Paper (Cmd. 7913) and continue to exclude both Seretse and Tshekedi. He therefore proposes that, with the approval of his colleagues, he should issue a White Paper containing the observers' reports, together with an introduction briefly rehearsing the case, making it clear that the issue is limited to Tshekedi's return and showing that the observers agree that a majority of the tribe is against his return. This covering statement would then reaffirm the Government's policy as set out in the original White Paper. I annex a draft of the statement which Mr. Gordon Walker would recommend (Annex A).

19. The Secretary of State recommends the immediate publication of this further White Paper. The situation in the Protectorate is unsettled and the local Administration is anxious to be able to state clearly the Government's decision on the observers' reports. This will reassure the Bamangwato and steady the other chiefs who are under great pressure from Tshekedi. He recently called a meeting in Mafeking of chiefs and persuaded them to sign a petition highly critical of the Government and asking for the return to the Reserve of both Seretse and Tshekedi. The chiefs have since explained that they were stampeded into signature of the petition, although they did not concur in all its terms. Something of Tshekedi's ambitions is revealed by the line he took with the chiefs, namely, that they should all work for his return "to take control and restore order among the Bamangwato" in return for which he would undertake to work for the return of Seretse.

20. One difficulty which will have to be faced is the insistent demand from the tribe that those followers of Tshekedi Khama who went with him into voluntary exile should also be excluded from the Reserve. The Secretary of State feels very strongly that we cannot allow exclusion to be carried to this length and he intends to tell the tribe so very firmly. It is in the Government's interest that Tshekedi's followers (some of whom are very able) should re-enter the tribe as we do not want a system of councils to grow up consisting exclusively of Seretse's adherents.

C.—Conclusions

21. Mr. Gordon Walker therefore makes the following proposals:

(a) To reaffirm the Government's policy to exclude both Tshekedi and Seretse Khama for a period of "not less than five years" from March 1950, as prescribed in the original White Paper (Cmd. 7913).

(b) To publish a White Paper embodying the observers' reports and conveying the decision at (a).

(c) To make clear to the Bamangwato tribe that we cannot give way to their pressure for the exclusion of Tshekedi's followers and that the latter must be received back into the tribe if they wish to return.

Commonwealth Relations Office, S.W. 1, 22nd September, 1951. ANNEX A

DRAFT TEXT OF WHITE PAPER

In July His Majesty's Government invited Mr. H. L. Bullock, Mr. D. L. Lipson and Professor W. M. Macmillan to visit the Bamangwato Reserve in the Bechuanaland Protectorate to report on the attitude of the Bamangwato tribe to the return of Tshekedi Khama to the Reserve as a private person. Mr. Bullock and Professor Macmillan have submitted a joint report and Mr. Lipson a separate report to the Secretary of State for Commonwealth Relations.

His Majesty's Government have carefully considered the reports and wish to record their thanks to the observers for the diligence and thoroughness with which they performed their task.

As stated in the White Paper on the succession to the chieftainship of the Bamangwato tribe (Cmd. 7913) a judicial enquiry was held in 1949 under the Bechuanaland Protectorate Native Administration Proclamation into the question of the recognition of Seretse Khama as chief of the Bamangwato tribe. The judicial enquiry unanimously advised against the recognition of Seretse and recommended that his absence from the Protectorate was essential to the peace and good order of the Bamangwato Reserve. They also recommended that Tshekedi Khama, who had earlier gone into voluntary exile in a neighbouring tribal area, should not be permitted to return to the Reserve. His Majesty's Government's decisions, whereby Seretse Khama is required to remain outside the Protectorate and Tshekedi Khama to reside outside the Bamangwato Reserve for a period of not less than five years, were fully set out in the White Paper (Cmd. 7913) published in March 1950.

In April 1951, Tshekedi Khama visited London and made representations to the Secretary of State for Commonwealth Relations against the order excluding him from the Bamangwato Reserve. The Secretary of State was unable to accede to Tshekedi's request, but offered him certain conditional facilities to enable him to care for his private interests in the Reserve. Tshekedi Khama rejected this offer. Subsequently the following motion was debated on 26th June in the House of Commons:

"That this House deplores the decision to continue the banishment of Tshekedi Khama from the Bamangwato Territory without hearing or inquiring into the grounds for such banishment; and calls upon His Majesty's Government to rescind the order of banishment and allow him to dwell freely within the territory of his tribe."

The motion was defeated.

In the course of the debate on this motion the Secretary of State for Commonwealth Relations offered on behalf of the Government to invite the tribe to hold a further kgotla (tribal meeting), attended by Members of Parliament as observers, to ascertain the tribe's attitude to the return of Tshekedi Khama as a private person. Since the Opposition parties were unable to agree that any of their members should go to Bechuanaland to attend the proposed kgotla, it was not possible to arrange a Parliamentary delegation. His Majesty's Government therefore invited Mr. H. L. Bullock, past president of the Trades Union Congress, Mr. D. L. Lipson, member of the Gloucester County Council and formerly M.P. (Independent) for Cheltenham, and Professor W. M. Macmillan, Director of Colonial Studies at the University of St. Andrews, to go to the Bamangwato Reserve with terms of reference requesting them "to report on the single question of the attitude of the tribe to Tshekedi Khama's return to the Bamangwato Reserve as a private individual."

The observers left the United Kingdom on 24th July and arrived in the Bamangwato Reserve on 26th July. On 11th August they reported that they and the local Administration had been unable to secure the agreement of the present tribal leaders to a kgotla attended by Tshekedi Khama and his followers. They therefore unanimously recommended that this proposal should be abandoned and that they should proceed to assess the views of the tribe on the question of Tshekedi Khama's return by means of a series of local meetings in every part of the Reserve. On 13th August the Secretary of State accepted this recommendation and agreed that endeavours to hold a kgotla of the Bamangwato tribe, attended by Tshekedi and his followers should be abandoned. The observers then pursued their task by attendance at a series of local meetings. They also saw and talked with Tshekedi Khama and his followers, chiefs from other parts of the Bechuanaland Protectorate and the Paramount Chief of Swaziland. They returned to the United Kingdom at the end of August.

In the opinion of His Majesty's Government the reports of the observers, of which the full texts are appended, show that a substantial majority of the tribe is opposed to Tshekedi Khama's return to the Reserve. His Majesty's Government therefore see no reason to vary in any way the decisions set out in Cmd. Paper 7913, whereby Seretse Khama is required to remain outside the Protectorate and Tshekedi Khama to reside outside the Bamangwato Reserve for a period of not less than five years from March 1950. ANNEX B

JOINT REPORT BY MR. H. L. BULLOCK AND PROFESSOR W. M. MACMILLAN

I.—Background

In July last we were asked by the Secretary of State for Commonwealth Relations to undertake a mission in the Bamangwato Reserve of the Bechuanaland Protectorate. The object of our mission is best set out in the following extract from a letter addressed to us by Mr. Gordon Walker on 20th July:—

"As I have explained in the House of Commons, the purpose of your visit is to report on the single question of the attitude of the tribe to Tshekedi Khama's return to the Bamangwato Reserve as a private individual.

As I also told the House, I intend to invite the Bamangwato tribe to hold a special kgotla under the presidency of an impartial person in order to establish their views on this question. I will cause my invitation to the tribe to hold this kgotla to be presented to them at a meeting with the tribal representatives in your presence. I have made it clear to the House that in my view this kgotla should be attended by Tshekedi Khama and his followers.

I hope you will use your best endeavours and all the weight of your influence to persuade the tribe to agree to hold such a kgotla and to re-emphasise to them that Tshekedi Khama has renounced all claims to the chieftainship. I would be grateful for your views and advice on details of arrangements for the holding of this kgotla. Any decisions that have to be taken must of course be mine, but I shall much value your advice and recommendations. Please do not hesitate to consult and advise me on any matters you wish at any stage of your visit.

I of course leave to your judgment any steps besides the holding of the kgotla that you may decide to take to ascertain for yourselves the views of the tribe on the question at issue and to consult with neighbouring chiefs and any other people you may wish to see. You may count on the full co-operation of my officers in any such steps that you may see fit to take and in all other ways."

02. The circumstances in which the issue of Tshekedi Khama's return to the Bamangwato Reserve came before Parliament are well known and need be recorded here only very briefly. For 23 years 1923-49 Tshekedi Khama had ruled the Bamangwato people as Regent for his nephew, Seretse Khama, the heir to the Chieftainship. During all these years Tshekedi had been in the position of father and mentor to Seretse and had cared for his affairs within the Reserve. Differences arose between them over Seretse's marriage in 1948. The tribe also was divided on this matter, and at the instance of Tshekedi, a series of kgotlas was held to discuss his position. Later a judicial commission was appointed to enquire into the circumstances that had arisen. In consequence of that commission it was decided by the Secretary of State that the chieftainship should be held in abeyance for five years and that Seretse Khama should for that period be required to live outside the Bechuanaland Protectorate. At the same time Tshekedi Khama was required to live outside the Bamangwato Reserve. These decisions, and the reasons for them, are recorded at length in the White Paper (Cmd. 7913) published in March 1950.

03. During the years of his regency, Tshekedi had cared for the cattle and other property that appertained to the chieftainship, to himself and to Seretse. In 1950 an effective distribution of this property was made. It is understood that, in fact, this distribution has given rise to disputes between the tribe, representing the chief, and Tshekedi, but such disputes will be a matter for the courts and do not concern this mission.

04. Since his departure, Seretse Khama has apparently experienced no difficulty in leaving his property within the Reserve to be managed by one Keaboka, fourth senior member of the chiefly family, who has since been nominated by the tribe as its leading representative and its "messenger" for the purpose of dealing with Government. Tshekedi, on the contrary, has not found it possible to leave his property to the care of a representative, and in 1950 sought and obtained the permission of the High Commissioner for a series of visits to the Reserve for the purpose of managing his affairs. These visits were made the subject of representations to the High Commissioner by representatives of the tribe, it being alleged..." that his presence in the Reserve was repugnant to the tribe, which was disturbed as to the intentions of both Tshekedi and Government. It is understood that the Secretary of State entered into prolonged negotiations with the intention of arriving at an accommodation with Tshekedi Khama that would secure to him adequate control of his property and yet be acceptable to the tribe. Those negotiations failed and the Secretary of State thereafter decided that the interest of peace and good order within the tribe demanded the re-enforcement of the exclusion order against Tshekedi Khama. Thereafter Tshekedi, having publicly renounced all claim to chiefship, demanded the right of free access to the Reserve as a private individual. The issue found its way to Parliament, in order to satisfy which the Secretary of State offered to send observers to the Protectorate to report on the true state of feeling within the Reserve.

05. The Bamangwato Reserve has an area of 40,000 square miles and a population roughly estimated to be 100,000 people. Of these only rather less than 20,000 belong to the Ngwato tribe proper, the remainder having from time to time broken away from their original tribes and affiliated themselves with the Ngwato tribe and acknowledged its supremacy. The Reserve is divided into nine districts, the chief of which is that surrounding Serowe, which is also the capital of the Reserve. The Serowe district is the stronghold of the Ngwato tribe proper, but a number of its members reside in the several districts and are normally amongst the most influential persons in them. The dominance of the Ngwato is ultimately due to the genius of Khama (1875-1923) who made his kingdom a rallying point for tribes scattered over the huge area in times when security was threatened from the North by raiding Matabele and from the South-East by the encroachment of European farmers. Khama's protection of the lesser tribes was made more effective by the backing he himself enjoyed from the Government of his great patron, Queen Victoria. Yet at that time, and even later, the protecting Government was in no position to assume what has come to be known as "direct" rule over this vast territory, so that from the beginning the Protectorate administration came to rely even for the maintenance of law and order almost entirely on the discipline enforced, until 1923 by Khama, and latterly by the Regent, Tshekedi. In consequence of this, native custom has been distorted and the power of the Chief raised considerably above any checks traditionally exercised by the people of the tribe over the chiefs' autocracy.

06. It was the great achievement of Khama's system that the rule he imposed through Bamangwato Representatives with the backing of the "regiments" from Serowe and ultimately of His Majesty's Government was loyally accepted and still is by the out-lying dependants. More than once some of us were corrected and told not to speak or think, e.g., of Bakalaka or Bakalanga, since all claim to be Bamangwato. Even if they have made little material progress these people were wisely allowed to retain their own tribal headmen and they continue to speak four or five distinct languages.

07. The Reserve, and all its people, are normally ruled by the chief, who occupies his position by right of birth. To each district he nominates a person known as the chief's representative, who rules on his behalf. The system is Khama's and the agents of the system, though they may constitute something like a civil service, were and still are drawn largely, though not now exclusively, from the members of Khama's family, being thus undoubtedly also a privileged aristocracy. Their Office clearly brings some profit as well as social prestige and they are intensely conscious and jealous of their order of precedence. In spite of the great almost untracked distances this ruling class maintain close links with each other and with Serowe, where they frequently gather for meetings, and where, as a result, tribal politics often have the intensity and ferocity of a village family dispute. The unity of the tribe is, nevertheless, something very real and jealously guarded, even if the system is thus aristocratic and, although not exclusively, autocratic. Certainly it admits of no organised opposition: to stand out against the ruling power on any major issue is to be guilty almost of treason.

08. Yet there are certain checks upon the use of power by the chief. The first of these is the kgotla, a meeting at which, in theory, every male adult member of the tribe has the right to attend and to be heard. We return to the point that the recent exclusion of Tshekedi's supporters is based on the ground that they have transferred their allegiance to another tribe, the Bakwena. Such kgotla meetings may take place at the village or district level, but it is accepted that all the great affairs of the tribe are discussed and determined in the presence of chiefs' representatives and tribal headmen meeting in formal kgotla at the Ngwato stronghold, Serowe. No vote is normally taken at such meetings. When all who wish have spoken the chief, or person presiding on his behalf, assesses the feeling of the meeting and announces his decision. In theory, as Tshekedi Khama had himself claimed lately, that decision may be his own and need not accord with the feeling of the meeting; in practice a strong chief can possibly go contrary to the views of the majority. The meeting in kgotla is, however, an essential part of the system of native rule and is accorded much respect by the Bamangwato as by other tribes of the Protectorate.

09. The second check upon the absolute rule of the chief is the devotion to tradition and to precedent embodied in the complex and unrecorded system of native law and customs. Tshekedi himself told us it is "case law." Arguments may and do arise as to the particular application of native law and custom. (e.g., as to the present claims of Tshekedi Khama), but custom is certainly a restraining force of some potency.

10. The Chieftainship of the Bamangwato has remained with the house of Khama, to which both Tshekedi and Seretse belong and which has included among its members some very remarkable Africans. Of these last Tshekedi Khama is acknowledged to be one, but all members of the very large royal family, whatever their personal merits, are to be reckoned with as people of influence.

11. The foregoing represents, in brief outline, the organisation of the tribe as it has existed for many years. It should be recorded that in recent months the Administration has been engaged, we understand with success, upon a series of reforms designed to establish more firmly the democratic principle. The intention is to establish councils on a new democratic model, comprising representatives nominated by the village kgotlas in each district of the Reserve, these councils being advisory to the chief's representatives, who would themselves be nominated by the district kgotlas and confirmed by the full (i.e., tribal) kgotla at Serowe. The district councils would in turn send representatives to a central council at Serowe, which would in due course become the constituted Native Authority, and in effect the executive, or working, committee of the tribal kgotla. In these reforms members of the subsidiary or "allied" tribes were to have equal standing with members of the Ngwato and, in fact, a number of them had been nominated both as chief's representatives and council members. All progress on these reforms ceased when the future of Tshekedi Khama came before Parliament. Then, as is well known, disturbances occurred within the Reserve.

II.—Moves towards a "Joint" Kgotla

12. We arrived in the Reserve on 27th July and were met by the High Commissioner and officials of the Administration, who most willingly placed themselves at our disposal and helped us in very way without in any way interfering with our judgment concerning the things we desired to find out. Indeed, we had made our minds up from the time of the appointment that nothing should prevent us from coming to our own conclusions; we made this quite clear to everyone concerned and it was appreciated by them.

13. We immediately addressed ourselves to the task of securing agreement to a special meeting of the tribe in kgotla with Tshekedi Khama and his supporters present. It had been hoped that the invitation to convene such a kgotla would be extended, and the arrangements for it discussed, at a meeting attended by representatives of both the tribe and Tshekedi (the latter had not himself yet returned to Africa). We were informed that the tribal representatives had resolutely refused to attend such a meeting and we perforce agreed to see the parties separately. We saw representatives of the tribe on 29th July and the supporters of Tshekedi, headed by Rasebolai, on 30th July. On each occasion the invitation to take part in the joint kgotla was extended on behalf of the Secretary of State by the High Commissioner (on 29th July by Sir Evelyn Baring, and after his departure, on the 30th by Mr. R. E. Turnbull). On the morning of the 29th the tribal representatives merely welcomed us as their guests and said that they were empowered to listen but not to answer. They agreed to meet us again, for informal discussion, in the afternoon, but, in the event, maintained the same attitude. They would not give us a precise date for their reply, but, upon our representations of urgency, promised that it would be soon. On 30th July the supporters of Tshekedi welcomed the proposal for a joint kgotla and promised their full co-operation. It can be stated that on that occasion, and on every subsequent one of our meetings, the supporters of Tshekedi gave every evidence of desiring to face their opponents at a joint meeting. It was clear that our difficulties in arranging it would lie only with the established representatives of the tribe.

14. We also had informal talks with the lawyers representing both sides of the dispute stressing all the time the need for a large tribal kgotla with both sides present and taking part in the discussions so that we could obtain a free, fair and independent expression of opinion on the issue before us.

15. Meanwhile, on 30th July, a meeting stated to be representative of the tribe had been convened in kgotla at Serowe and a reply on behalf of the tribe to the Secretary of State's invitation reached us through the District Commissioner on 31st July. The reply was to the effect that the tribe regretted that only under the presidency of Seretse, Tshekedi's one senior in the tribe, would it be possible under Bamangwato law and custom to permit Tshekedi's presence. It went on to suggest that the interests of all would be best served if we agreed to travel throughout the Reserve and make direct contact with the people in the villages and towns.

16. At our invitation a small deputation, led by Keaboka, visited us informally on the morning of 1st August. They enlarged to some extent upon the reasons for the refusal (these reasons will be discussed later in this report) but were clearly unwilling to amend their attitude.

17. The refusal was firm, but we were not then disposed to accept it as final. It was, nevertheless, obvious that any process of persuasion would be prolonged and might even then be unsuccessful. It therefore appeared to us to be the wiser course to adopt, as an interim measure, the suggestion of the tribal representatives for a series of district meetings, in arranging which they were prepared to co-operate. It seemed, indeed, that quite apart from the knowledge we would gain of the Reserve and its people a programme of such meetings might be the best means of establishing confidence in our mission and thereby persuading the representatives of the tribe of the wisdom of holding a joint kgotla.

18. In the ensuing nine days we travelled an aggregate of 1,500 miles and were present, either together or separately, at 8 meetings attended by perhaps 4,000 members of the tribe. Before our departure the tribal representatives, though they could not agree to a joint kgotla with Tshekedi present, said they would not offer objection to the presence at such local meetings of any of Tshekedi's supporters who lived in, or happened to be present in, the several localities. In fact, supporters of Tshekedi appeared at only four of these earlier meetings. At Mahalapye some 30 of them appeared before our arrival, but the reaction of the gathering was so antagonistic that they had no choice but to leave under police protection. At Madinare nine of Tshekedi's supporters and at Bobonong one, appeared; in both cases the people refused to proceed with the meeting until after they had departed. At Sefhare (claimed by Tshekedi to be a centre where support for him is strongest) 30 Tshekedi men, some of them from Rametsana, sought to attend the meeting at which 300 persons were present. Mr. Lipson intervened in their behalf and in this instance the Headman allowed them to remain. It is significant of the weight of influence attaching to rank that Tshekedi himself presently claimed that his Sefhare supporters owed this immunity to the seniority enjoyed by their foremost leader.

19. The meetings were most successful in the interest they attracted. At all times the tribesmen were most polite and courteous, making us welcome, but they also made overwhelmingly clear their attitude to Tshekedi. This they did not by vote so much, although in one or two instances votes were taken, but by methods reminiscent of a Quaker meeting, i.e., after many speeches from the tribe the headman expressed the spirit of the meeting. Often it was pointed out to us that the question we were putting had been answered by the tribe more than once or twice before and that they had given clear and definite answers which left no room for doubt.

20. On Friday, 10th August, we all three reassembled at Mahalapye and resumed our efforts to persuade the tribal representatives to agree to the holding of a joint kgotla. In those efforts we were supported by the Administration. On the morning of 11th August the High Commissioner met some 60 of the representatives and in the afternoon we saw the same people. Both meetings were unsuccessful and at the second the tribal representatives went so far as to suggest that if they were pressed further on the point they would be unable to continue their co-operation with us, even limited as it was to district meetings.

21. Time had begun to press, and it was necessary for us to consider the recommendations we could make to the Secretary of State as to the proposed joint kgotla and our further programme. In the event, we advised the Secretary of State, strongly and unanimously, that the effort to secure a joint kgotla should be abandoned. In doing so we further expressed our unanimous and unqualified opinion that the alternative programme of investigation upon which we were engaged would give us all the opportunity we needed to arrive at a true valuation of the views of the people of the Reserve on the one question that was before us. Our reasons for making these recommendations may be summarised as follows:—

(1) The smaller informal district meetings which we had attended and which, as stated above, numbered in the aggregate some 4,000 persons, had been a success in that we had been able to make intimate contact with the rank and file of the tribe, many of whom freely expressed their opinions in open debate.

(2) The freshness of discussion at these meetings, and the variety of speakers, had been such as to rule out the possibility of wholesale previous direction. It is true that the failure to arrange for a joint kgotla meant that Tshekedi Khama had had no opportunity to state his case in person to the people of the Reserve and that, consequently, we had had no opportunity to observe their reactions to such a personal statement. It is not for us to hazard conjecture as to the effect upon the tribe of a statement of his case by so compelling a personality as Tshekedi Khama, but we have no hesitation in recording our conviction that in their present mood the people of the Reserve would not, in fact, give him a hearing.

(3) To force the joint kgotla against the wishes of the tribal representatives would almost certainly be answered with a boycott by their supporters. The ability of the tribe to boycott a meeting had been effectively demonstrated in 1950, and we decided that a kgotla summoned in such circumstances, attended as would be likely only by Tshekedi and his supporters, would in no way advance the primary purpose of our mission. More was likely to be gained from the meeting, already arranged, with Tshekedi and his people on his own ground where there would be no opposition and no difficulty in securing the attendance of his supporters.

(4) Again, we had already received evidence of such strong feeling within the tribe that we could not ignore the possibility that, even if a joint kgotla could be arranged, emotions might gain the upper hand and the kgotla end in disorder.

(5) Finally, although we had faithfully undertaken the task imposed upon us by the Secretary of State of seeking to secure a joint kgotla, it was the case that native law and custom would make a full tribal kgotla essential only if a decision were required from the tribe. Our mission was only to assess the state of feeling within the tribe and our ability to do this in one large formal kgotla might actually be restricted.

22. In making these recommendations we received the full support of the High Commissioner and the Administration. On Tuesday, 14th August, we learnt that the Secretary of State had accepted our recommendations and had decided that the intention to hold a joint kgotla could be abandoned in favour of our alternative programme of investigation.

III.—Alternatives to the Joint Kgotla

23. On Monday, 13th August, we met Tshekedi Khama at Rametsana, the locality within the Bakwena Reserve just south of the Bamangwato border to which he had retired in 1949 and to which Seretse's father had been exiled by his own father many years before. We held three private meetings with Tshekedi and attended a public meeting of fully 200 of his supporters, at which Chief Kgari of the Bakwena was also present. Tshekedi repeated the arguments which have become so familiar in interested circles in London. He expressed the belief that if he were allowed into the Bamangwato Reserve he could ensure a joint kgotla. As we state elsewhere in this report, remembering how the High Commissioner's meeting was boycotted in 1950, we did not share his confidence.

24. On August 15th we were present at yet another district meeting at Palapye. A number of Tshekedi's supporters sought to attend, but their presence was resented by the mass of the people and the headman asked us to arrange for them to leave before the meeting could proceed. Appeals failed to move the people, and after some discussion between ourselves we agreed that since it was their own meeting the headman himself must take responsibility for asking them to go.

25. On Thursday, 16th August, we held our final meeting in the Reserve, at the capital, Serowe. This was a most impressive gathering of between 5,000 and 6,000 people, presided over by Keaboka as leading tribal representative, who had also invited the small European population of Serowe to be present as witnesses. Keaboka did not himself address the meeting except as Chairman to introduce us and state our object. If there were nominated speakers among those taking part there were certainly more who spoke extempore and took their chance among the many who wished to speak. The refusal to agree to a joint kgotla was forcefully explained and on two occasions, by loud and spontaneous acclamation, the meeting left no doubt as to the general feeling on the subject of Tshekedi's return. No recognised followers of Tshekedi were present and none sought to attend.

26. In the afternoon of the same day we met and talked with more than 1,000 women of the tribe, a succession of whom passionately and even threateningly elaborated the theme "we do not want Tshekedi back." (Women, too, were the ringleaders in the disturbance at Mahalapye that made it impossible for Tshekedi's small band of supporters to state their case at our meeting.) This we note as a novel departure in local custom, since it is not the women's habit to engage in political discussion. That they should have done so on this occasion is evidence of the strong emotion they feel on the subject of the present dispute.

27. On 17th August, at Gaberones, we met, in the morning, some of the leading Europeans in the Protectorate, members of the European Advisory Council. In general they confirmed our interpretation of views expressed at the tribal meetings. They were helpful especially about the economic background, an important aid to understanding, but outside the scope of this report.

28. In the afternoon we met chiefs of other tribes in the Protectorate, with their leading advisers, in all some twenty-six members of the Protectorate African Advisory Council. It is of interest that this Council were strongly of opinion that full discussion demanded the presence of both parties to the dispute, expressing regret that the Bamangwato representatives failed to accept the invitation to attend. Tshekedi was present, and the fact that those who spoke did so in his favour is perhaps a tribute to his great personal magnetism, but it also reflected the preoccupied concern of the speakers for the rights and privileges of Chiefs and chiefly families.

29. There was also made available to us for questioning a panel of respected Africans versed in native law and custom. It is evidence of the difficulty of interpreting custom that Tshekedi objected to all three members of this panel (one of whom is an expert constantly used in the Courts) but by this we were not greatly moved since there was now little that we had need to refer to them.

30. We then left the Bechuanaland Protectorate for Swaziland, where, on Monday 21st August, we had the pleasure of meeting Sobhuza, Paramount Chief of the Swazi Nation, and his Council. The Paramount Chief, a very distinguished African, strongly urged that the Bamangwato dispute in all its aspects be submitted to a conference of leading Africans. On a major issue, however, he was sceptical about the very possibility of Tshekedi returning to his country as "a private citizen."

IV.—Conclusion

31. In pursuing our task many matters came to our attention but only upon one, the views of the people of the Reserve on this question of the return of Tshekedi Khama as a private individual, are we called to judge. On this one question we have no hesitation in declaring that the return of Tshekedi Khama in any capacity whatsoever at the present time and in the present circumstances would be contrary to the wishes of the majority of the tribe and bitterly resented by a substantial number. On this issue emotions now run dangerously high throughout the tribe.

32. Only on one condition, that Seretse Khama were present to preside, would the people agree to hear Tshekedi. That possibility is outside our terms of reference.

33. The main reason advanced to us, at our many hearings, for the refusal to hold a joint kgotla in the presence of Tshekedi was this; that Tshekedi, having left the Reserve and declared his allegiance to the Bakwena tribe, had thereby surrendered his right to take part in Bamangwato tribal discussions, and that by departing from native law and custom so far as to permit his return to attend a tribal kgotla, they would open the way to a resumption by him, by the mere force of tradition, of all the authority that previously pertained to him as the senior member of the tribe second only to Seretse. This argument rests upon the claim that by native law and custom Tshekedi's presence in a tribal kgotla would make him again a member of the tribe, and the rest would inevitably follow. We do not regard it as incumbent upon ourselves to pronounce upon this question of native law and custom. It is sufficient to state that it is the view clearly and strongly held by the tribe. To them "private citizenship" is impossible to a man of Royal rank.

34. In fact, the mass of the tribe reject Tshekedi Khama's declaration of his renunciation of all claim to the chieftainship. In their view, whatever the intentions of Tshekedi, once he was again received as a member of the tribe, his claim to seniority within the tribe would be inalienable, even by himself. It is their contention that in making this renunciation, Tshekedi Khama was appealing to a British way of thought, and one that he knew to be foreign to the Bamangwato.

35. It must be recalled that the present division in the tribe arose not from Tshekedi's going but from Seretse Khama's defiance of tribal opinion by marrying as he did in September 1948 without the tribal sanction that custom demanded. The division only became palpable after June 1949 when, in the kgotla meeting called by himself, Tshekedi suffered political defeat. In this connection, we were impressed by the evidence that Tshekedi's action in leaving the reserve was indeed "strictly in accordance with tribal law and custom." He then appeared to accept and act on the tradition that there is no place for an opposition party within the tribe, and at the tribal kgotla, and that a defeated leader can only "retire to his cattle post" or, preferably, banish himself altogether.

36. If western phraseology is at all applicable Tshekedi's Government suffered a parliamentary defeat on a vote of confidence. It appears to the tribe, therefore, that Tshekedi's demand for readmission to the Reserve goes back on his former decision and is an attempt to climb back to power, with his Ministers, with the backing of the Bechuanaland Protectorate Administration and of His Majesty's Government. It has even been suggested that the true analogy is to be found in Charles the First's dealings with his Parliament.

37. At this point the conventions of the tribal aristocracy and hierarchy, and especially their general acceptance by the people, gravely complicate the issue. At every meeting we attended it was obvious how every man knows his own station, from the lowest to the highest, and it is particularly at the highest levels that this matters. Genealogical tables are readily available making clear (what every tribesman knows) the present rank in the hierarchy of the almost innumerable individuals of the Royal family—Seretse is No. 1, Tshekedi No. 2, Rasebolai (Tshekedi's right hand) No. 3, Keaboka No. 4 and so to the nth. During our visit, Rasebolai—No. 3—having been "ordered" out of Serowe by the tribal representatives was eventually bowed out with salutations of "Nkosi" (Chief). At every point we were met by the argument that these Royal rights are an inalienable birth-right.

38. The chief fear is that if Tshekedi returns in the absence of a superior he will and must step as of right into the position of Chief and bring about a counter-revolution—and this in spite of what amounted to his constitutional displacement by the kgotla in 1949. It is, in fact, impossible to conceive of Tshekedi "as a private citizen" so long at least as the Serowe kgotla is the dominant factor in Bamangwato politics. If he is at liberty to attend he automatically becomes its chairman and ruler, and he has himself gone so far as to claim that by custom the decision of the kgotla is the decision of the president alone.

39. In the course of our investigations we were faced with a series of personal grievances, some of them dating from many years past, against Tshekedi. After 23 years of personal rule personal grudges were perhaps to be expected. There can be no doubt of the great administrative ability shown by Tshekedi Khama in the past, nor that he has great ambitions for the Bamangwato tribe. We received an impression, none the less, that if only for want of effective administrative machinery, Tshekedi's personal exercise of power paid little regard to the individual or his rights. It is significant that the spokesmen of the allied tribes in the "back blocks" were solid with those elsewhere in their expressed opposition to the return of Tshekedi. In their eyes even his laudable work for the Bamangwato Secondary School at Moen (?) involved them chiefly in the payment of a heavy cattle levy which left so much less revenue for the establishment or development of schools needed in their own localities. Clearly wishing to continue to enjoy greater freedom to manage their own affairs, the people now fear the return of this powerful personality.

40. We would record also that we have received ample evidence that this hostile feeling extends, in lesser but still large part, to the leading supporters of Tshekedi, the so-called Rametsanes. It is our view that this feeling is one of such strength that the Administration may have to give this minority positive protection. Although the emotional storm makes it hard to judge the number of those who would in different circumstances be prepared to follow Tshekedi, there is no doubt that his active supporters include a high proportion of the ablest and administratively most experienced members of the Bamangwato and that their permanent exclusion from the Reserve would represent an impoverishment of the tribe.

41. Perhaps our overriding impression is this, that the greatest need of the people of the Bamangwato Reserve is a period of peace to go about their everyday affairs freed from the distraction of continuing disturbances resulting from consideration of the affairs of members of the chiefly house.

H. L. BULLOCK. W. M. MACMILLAN.

September 1951. ANNEX C

REPORT BY MR. D. L. LIPSON

01. The purpose of the visit of the three observers to the Bamangwato Reserve was to find out and report on one question only: whether the tribe was in favour of the return of Tshekedi to the Reserve as a private individual or not, he having renounced all claims to the chieftainship.

02. It was originally hoped to obtain this information by the summoning of a special kgotla to be held at the capital, Serowe, which Tshekedi and his supporters would attend. We were to convey to the tribe the invitation from the Secretary of State to hold such a meeting.

03. Our first aim was to get both the opponents and supporters of Tshekedi to agree to the holding of a joint meeting. It was necessary to approach each side separately in order to obtain consent. Soon after our arrival in the Reserve we met on two occasions representatives of the tribe who were opposed to Tshekedi and urged them to accept the Secretary of State's invitation. They answered that before giving their reply they must consult those whom they represented in the various districts from which they had come. Subsequently they declined the invitation. The reason they gave was that it would be contrary to "native law and custom" to hold such a meeting. Tshekedi, they said, had left the Bamangwato and gone to the Bakwena tribe, to whom he now owed allegiance and paid taxes; he could not, therefore, take part in a kgotla of the Bamangwato. They declared that they were at war with the supporters of Tshekedi and could not agree to sit down at a meeting with them.

04. Our approach to the representatives of the supporters of Tshekedi, whom we next met, resulted in an immediate acceptance of the Secretary of State's invitation. They welcomed, and to the end continued to ask for, a joint kgotla.

05. The representatives of the tribe in refusing the Secretary of State's invitation said that they were willing for us to move freely throughout the Reserve and to attend kgotlas in the districts. These would enable us to ascertain the views of the tribe on the question of Tshekedi's return.

06. We decided that it would be unwise at this stage to press our request for a special joint kgotla lest it might lead to the tribal representatives being unwilling to co-operate with us in the holding of the district kgotlas. They had already told us that if a special joint kgotla was summoned by the District Commissioner, who was the legal Native Authority, they would boycott it, as they had done on a previous occasion. We should then be faced with the presence of only Tshekedi and his supporters and that would not serve the purpose of our mission. We hoped, however, that if the district kgotlas were a success and we were able to convince the tribal representatives as a result of better acquaintance with us that we were independent observers, not concerned with taking sides as to whether Tshekedi should return or not, but only anxious to obtain the true view of the tribe as a whole on this matter—that they might later be willing to reconsider their decision against a joint kgotla.

07. We then decided that in order to cover the whole Reserve it would not be possible for the three observers to attend all the district kgotlas, so agreed to go separately on tour and each one of us to take his share of the meetings.

08. Before doing this we held a tribal meeting at Mahalapye at which all three of us were present and spoke and heard the views of those present.

09. At only one of the district kgotlas, that at Seffhare, were supporters of Tshekedi allowed to be present, and there it was in consequence of a special appeal made to the headman. At this meeting the 300 present included 40 supporters of Tshekedi, some of whom spoke and were heard without interruption by the rest.

10. These district kgotlas had this advantage: many of the speakers described themselves as private individuals. In this way we were enabled to obtain the view of the rank and file. At a special kgotla the speeches would have been made by the leaders only.

11. All the same the district kgotlas were only a second best. Nothing could help us so much to form a true opinion of the views of the tribe as a joint kgotla. at which both parties to the dispute were present and were able freely to express their views.

12. On our return from tour we made a further attempt to secure a joint kgotla. An appeal was made to 60 representatives of the tribe, but they persisted in their refusal.

13. We three observers then went to Rametsana to meet Tshekedi and 200 of his supporters who were there with him. We had three meetings with Tshekedi personally and one with his supporters. He and other speakers declared that he renounced all claims to the chieftainship, had committed no crime, all that he asked for was permission to return to the Reserve as a private individual and look after his own personal affairs. (He is the owner of a large number of cattle, the majority of which are in the Reserve, and maintained that their proper care required his personal visits to the cattle posts in the Bamangwato territory.) He asserted that he had been banished without trial not by the tribe but by the British Government.

14. The Rametsana meeting was followed by two others, one at Palapye and the other at Serowe. At the former, attended by about 400, the headman insisted on the exclusion of 5 Tshekedi supporters who had come there. A strong protest was made against their exclusion, but efforts to secure their attendance did not succeed, and the meeting proceeded without them.

15. The exclusion here and at other meetings of supporters of Tshekedi was proof of intimidation. It is true that the number excluded was small but it is reasonable to suppose that there were many other supporters of Tshekedi who were afraid to attempt to attend meetings because they feared violent treatment from their opponents.

16. The Serowe meeting was the largest we had attended. There were over 5,000 present. A final appeal was made there for a joint kgotla. It was pointed out to those present that, large and important as the meeting was, it was not the kgotla which the Secretary of State had hoped would take place because it was representative of only one side. The appeal fell on deaf ears. There can be little doubt that the representatives of the tribe had made up their minds before we entered the Reserve not to accept the Secretary of State's invitation to a joint kgotla. They paid no heed to the arguments used in favour of acceptance. In my opinion one reason for their refusal was their fear of the influence the presence of Tshekedi and his supporters at a joint kgotla might have in winning over some of their supporters to his side. The experience of the meeting at Sefhare showed that it was possible for supporters of Tshekedi to be present at a kgotla and speak without fear of violence, if the leaders gave their consent to their being present. The blame, therefore, for the refusal to hold a joint kgotla rests entirely on the representatives of the tribe. I believe that, if they had agreed to a joint kgotla, their followers would have accepted their decision.

17. In the afternoon we attended a meeting of the women of Serowe at their special request. This was a unique event since the kgotlas were attended only by the male population; women had never before held such a meeting. Between 1,200 and 1,500 women came to the meeting and many of them spoke. They pursued the same anti-Tshekedi line which we had heard from the men speakers at their kgotlas. If anything they were more bitter in their denunciation of Tshekedi and indulged in more threats against his person, if he returned to the Reserve, than we had heard from the men. It is a matter of conjecture how they came to be so violently anti-Tshekedi.

18. In the course of these meetings we addressed between us from 11,000 to 12,000 of the adult population. It was quite clear that the overwhelming majority of them were strongly opposed to Tshekedi's return under existing circumstances. The principal reasons for this appeared to be:

(a) They held Tshekedi chiefly responsible for the banishment of Seretse. This, of course, is not true. They believed that his opposition to Seretse's marriage was due to the desire to obtain the chieftainship for himself.

(b) Tshekedi had been Regent during Seretse's minority for 22 years and had certainly many achievements to his credit, but it was alleged that his rule had become increasingly autocratic, harsh and cruel and that in the carrying out of schemes, excellent in themselves, he had shown no consideration for those who had to do the work they entailed. They insisted that it was not possible for Tshekedi to return to the tribe as a private individual; he was by birth second in rank only to Seretse. If he returned, while Seretse was absent, he would automatically have the right and influence which his royal birth demanded according to native law and custom. "He was a chief by birth," they said, "only God could take his right away." In practice, therefore, it is not possible for Tshekedi to live in the tribe as a private individual in the absence of Seretse.

They further declared that according to native law and custom Tshekedi, before he could return to the tribe, would have to come and ask for forgiveness from the chief of the tribe and obtain his consent to be readmitted. In view of Seretse's banishment the tribe had no chief and, therefore, there was no one to whom Tshekedi could make his appeal.

During the course of our three weeks' stay in the Reserve we also discussed the question of Tshekedi's return to the tribe as a private individual with the lawyers representing both parties to the dispute, with representatives of the traders in the Reserve, with the European and African Advisory Councils, and other leading African chiefs. After leaving the Reserve we visited Swaziland and had a very interesting meeting with the Paramount Chief, Sobhuza, who discussed with us the reactions of the quarrel in the Bamangwato on the African race.

The meetings we had attended gave the impression that there was an overwhelming majority against the return of Tshekedi but, before coming to this conclusion, there are other factors to be taken into consideration. Tshekedi was banished from the Reserve. His opponents, on the other hand, were in control of the tribe and were free to organise opposition to his return. The Secretary of State had undertaken that, if a special joint kgotla took place, the banishment of Tshekedi would be suspended for the three weeks during which the arrangements for it were being made. He would then have been free to visit the Reserve, organise his supporters, deal with any attempts at intimidation of them and encourage them to come forward openly in his support. Further, at the joint kgotla he would have the opportunity of stating his case and attempting to remove what he considered to be unfair accusations against him. Tshekedi is undoubtedly a man of very great ability and, in view of this and of his right of precedence, his presence at such a kgotla might have influenced many to have changed over to his side. It would also have been possible to have put to the test the fears that were expressed in some quarters that his return to the Reserve would lead to serious violence and disorder.

It is not easy to assess what proportion of the tribe would have been won over to favour Tshekedi's return if he had been as free to make out his case for it as his opponents were to make out theirs against it. My own view is that, in spite of all that Tshekedi could have done, there would still have been a substantial majority against his return, so long as Seretse remained in exile. The chief fear of very many of those who were opposed to Tshekedi's return would probably be removed had Seretse also been allowed to return. They would, for the most part, acquiesce in his return, if Seretse were back in the tribe as chief and agreed that Tshekedi might rejoin the Bamangwato. Meanwhile conditions in the tribe are deteriorating owing to the lack of strong leadership.

27th August, 1951.

D. L. LIPSON. CABINET

REPORT ON DISCUSSIONS IN WASHINGTON AND OTTAWA ON BALANCE OF PAYMENTS AND DEFENCE QUESTIONS

Memorandum by the Chancellor of the Exchequer

BALANCE OF PAYMENTS POSITION

I informed my colleagues before I left for Washington in paper C.P. (51) 242 of our worsening balance of payments, and particularly dollar, position and of my intention to discuss these matters with the responsible American Ministers and also with representatives of the Commonwealth in Washington. I was authorised by the Cabinet to inform the United States Administration fully of the worsening of our dollar situation and to discuss possible remedies on the lines proposed in the Cabinet discussion (C.M. (51) 58th Conclusions, Minute 4).

2. Accordingly, on my arrival in Washington I saw personally all the main Ministers concerned and handed to them a copy of the memorandum which is attached at Annex I. I stressed the top secret nature of this memorandum and asked that it should be dealt with within as restricted a circle as possible in each Department. It is in fact the case that there have been no leaks on the American side.

3. I thought it wise to follow up this initiative later by handing to the same Ministers a memorandum setting out ways in which the United States could assist us. The copy of this memorandum is attached at Annex II.

4. The information contained in the first memorandum came as a considerable shock to the American Ministers and at first there was an inclination among their officials to argue that we were taking too pessimistic a view and were not discounting sufficiently the temporary factors. I was able, however, to dispel these doubts and I think it was quite clear that at the end of my visit the Americans were in no doubt about the seriousness of the situation. It is, however, not possible for me to report any definite agreement with the Americans about action which might be taken. The main object of providing these two memoranda to the Americans was to ensure that the Agencies and Ministers principally concerned should know of the position before they started to draw up their proposals for their next Mutual Security legislation. This objective has been achieved and our representatives in Washington will enter into discussions on the details of the second memorandum with the Americans as soon as possible. While I cannot give any forecast of what line the Americans are likely to take I can say that our position is now fully understood and will be considered with sympathy and understanding.

5. I also took the opportunity to explain the position to representatives of the Commonwealth in Washington. Copies of the first memorandum have been sent to Commonwealth Governments through ordinary channels, and I told representatives of the Commonwealth in Washington that we contemplated having a meeting of the Commonwealth countries at the official level about mid-November to consider the action which we should take on a joint basis to deal with the position. I am proposing to go ahead with the arrangements for this meeting of officials, and a telegram will be sent accordingly in the near future.

WAIVER OF INTEREST ON UNITED STATES/CANADIAN LOANS

6. I propose to make an oral report to my colleagues on this matter.

DEFENCE

7. My second objective in Washington was to bring some sense of economic reality into the discussions due to take place in Ottawa on the size of the defence programmes of the North Atlantic Treaty powers. The American intention clearly was to use the Ottawa Conference as an opportunity to press the European members to increase their programmes still further on the ground that in total they fell short of the requirements of the Medium-Term Defence Plan, and still more of the recently formulated requirements of General Eisenhower. It was clear that in the circumstances in which we found ourselves, this was completely unrealistic and the result of the two parts of the North Atlantic Treaty Organisation, the military and the economic, proceeding on parallel lines without proper consultation with each other; what seemed to me to be required was a means of confronting those responsible for the military requirements with those of us who were aware of the economic possibilities and limitations.

8. When the Foreign Secretary reached Washington from San Francisco I discussed the matter with him, urging that it should be added to the agenda for his tripartite conversations with Mr. Acheson and M. Schuman, in order that a common line of policy might be evolved between the Americans, French and ourselves before we went to Ottawa. A tripartite meeting was accordingly arranged at which I set out our position, and M. Mayer explained that the position of France was roughly parallel to our own. He went on to propose the setting up of an ad hoc group of four "wise men" to analyse the problem and make recommendations to the Governments. Mr. Acheson was obviously impressed with the seriousness of the position and it was agreed to give further thought to the French proposal.

9. Soon after we reached Ottawa I had further discussion with Mr. Foster and M. Mayer, as a result of which we secured agreement to the following:

(a) Since the problem was not merely a technical one, those appointed to deal with it should be either members of, or at least in the closest touch with, their Governments;

(b) Ideally the group should consist of representatives of the three major powers only, but some arrangement would have to be made to associate the smaller powers with its work.

(c) The arrangement would be ad hoc and temporary in character, so as not to supersede the regular agencies of the North Atlantic Treaty Organisation, and so that the findings might be arrived at in time for the next submission to Congress. Proposals on these lines were accordingly introduced into the Council, and after some difficulty over the size of the group, the Council adopted the resolution which is reproduced as Annex III. It will be noticed that the resolution describes the new body as a temporary committee of the Council, and that it is required to report its findings to the Council not later than 1st December, 1951. At the same time an understanding was reached that the Chairman would be the American representative (who will almost certainly be Mr. Harriman) and that the British and French representatives would be the Vice-Chairman, who with the Chairman will form the Executive Bureau. I shall wish to discuss with my colleagues the questions that arise regarding the appointment of our representative.

K.G.

Treasury Chambers, S.W.1.,

25th September, 1951. 10. Proposals on these lines were accordingly introduced into the Council, and after some difficulty over the size of the group, the Council adopted the resolution which is reproduced as Annex III. It will be noticed that the resolution describes the new body as a temporary committee of the Council, and that it is required to report its findings to the Council not later than 1st December, 1951. At the same time an understanding was reached that the Chairman would be the American representative (who will almost certainly be Mr. Harriman) and that the British and French representatives would be the Vice-Chairman, who with the Chairman will form the Executive Bureau. I shall wish to discuss with my colleagues the questions that arise regarding the appointment of our representative.

H.G.

Treasury Chambers, S.W.1.,

25TH SEPTEMBER, 1951. ANNEX I

UNITED KINGDOM BALANCE OF PAYMENTS POSITION

A. The Gold and Dollar Accounts

1. At the present moment the gold and dollar balance of payments of the Sterling Area is deteriorating rapidly. In the first quarter of 1951 there was a surplus of £360 million, which fell to £54 million in the second quarter. Thereafter the balance moved into heavy deficit, and this has tended to accelerate. Figures since the beginning of the year are as follows:

Sterling Area Gold and Dollar Balance

| Month | £ million | |-------------|-----------| | January - March (monthly average) | 120 | | April | 59 | | May | 1 | | June | 5 | | July | 137 | | August | 211 |

2. In the first two months of the present quarter, therefore, the deficit has amounted to nearly £350 million. There may be some improvement in September because of the non-recurrence of certain special items. But the quarterly figure as a whole is likely to approximate to a deficit of £500 million. As receipts under E.R.P. are now very small, practically the whole of this deficit will have to be met from the reserves, which will, therefore, fall by about 12% in a single quarter (from £3,667 million to approximately £3,400 million).

3. Though some of the factors responsible for the heavy third quarter deficit will not recur in the fourth, and though there may be some seasonal improvement as well, the fourth quarter is likely to continue to show a considerable deficit, probably of the order of £300 million. This would imply a deficit of some £775 million in the second half of this year and a loss of reserves in six months approaching £3 billion or about 20% of the reserves at the end of June.

4. The main factors responsible for this rapid change in the position are considered in greater detail below. It is clear from the movements which have taken place or are in prospect that we face an altogether different position from that which was envisaged by the United Kingdom in its submission to the Financial and Economic Board of N.A.T.O. in connection with the investigation into the problems of sharing the burdens of the defence programme. It is equally clear that the situation is radically worse than that envisaged in the estimates and calculations of the United States Administration in its own submission to Congress in connection with discussions on the Mutual Security Bill. A comparison of the latest, very tentative, United Kingdom estimates of the Sterling Area's gold and dollar balance of payments in 1951/52, with the earlier estimates made last April in the submission to N.A.T.O., and with the official estimates of the United States Administration are shown in the table below. In addition, this contains a very schematic projection of the gold and dollar accounts to cover the calendar year 1952. Finally, details of the actual outcome in the year 1950 are given, against which all these projections may be compared.

### Sterling Area Gold and Dollar Accounts

**Comparison of Forward Projections and of these with results in 1950**

| | 1950 Actual | Latest U.K. | U.K. N.A.T.O. | U.S. official | Latest U.K. Schematic | |------------------|-------------|-------------|---------------|---------------|-----------------------| | **U.K. Imports** | 1,192 | 2,140 | 2,100 | 2,010 | 2,100 | | **Exports** | 882 | 1,160 | 1,000 | 1,125 | 1,180 | | **Invisibles** | | | | | | | (net) (excluding M.D.A.) | - | 360 | 50 | 157 | 360 | | **Current balance** | -310 | -1,340 | -1,150 | -1,042 | -1,280 | | **U.K. Capital** | 302 | -45 | -30 | | 10 | | **R.S.A. (net)** | 845 | 510 | 1,105 | | 370 | | (including Irish E.R.P.) | | | | | | | **Third countries** | 13 | 156 | - | 207 | 100 | | **Other** | 12 | 169 | 50 | 55 | 100 | | **Sterling Area Balance** | 852 | -1,200 | -125 | 270 | -1,100 | | **M.D.A. and residual E.R.P.** | 750 | 100 | 276 | 106 | 60 | | **Change in reserves** | 1,612 | -1,100 | 151 | 376 | -1,040 |

(($) = plus)

(a) Including 45 Canadian Credit

Comparison between latest estimates and results for 1950.

05. Compared with 1950 the latest estimates for 1951/52 show a deterioration in the sterling area gold and dollar balance of over ($2) billion. After allowing for the fact that dollar assistance amounting to some ($2) billion was received in 1950, against only ($100) million expected in 1951/52, the difference in the movement of the gold and dollar reserves is approximately ($2) billion; that is, an expected loss of ($1.1) billion compared with a gain in 1950 of over ($1.6) billion. This loss is equivalent to some 30% of total reserves at 30th June, 1951. Moreover, a most disturbing feature of the situation is the fact that so far as can be seen the outlook for 1952 as a whole is not significantly better and a loss of reserves during the year of the order of ($1) billion appears to be in prospect.

06. Although the position in recent weeks has been affected by certain temporary and seasonal factors, the major part of the deterioration in 1951/52 compared with 1950 which is illustrated in the table above is attributable to significant underlying influences. Eight major factors can be distinguished as responsible; these are dealt with briefly in the paragraphs which follow.

07. The first factor is the increase in United Kingdom expenditure on imports from the dollar area. Compared with 1950, the import programme for 1951/52 shows a rise of over $900 million. Of this, stockpiling purchases and defence machine tools account for some $300 million. Of the remaining $600 million, the rise in prices of dollar imports (which is expected to amount to 26% compared with average 1950) accounts for 54% and the increase in volume of imports for the remaining 36%. The actual volume of dollar imports programmed (apart from stockpiling and defence tools) is estimated at 18% above 1950 (mainly wheat and flour, tobacco, timber, wood pulp, cotton and non-ferrous metals). This programme is the absolute minimum required to meet essential needs for foodstuffs, and to provide the raw materials on which production and the defence programme itself depend.

08. The second factor is the halt to the rise in the volume of United Kingdom exports to the dollar area. Exports of raw materials and semi-manufactured goods have already had to be restricted because of shortages. Other exports, e.g. vehicles and textiles, have been affected by weakening demand. Though actual receipts from exports are expected to rise by $250-300 million compared with 1950, this is primarily the result of higher prices. Increased earnings from exports will thus meet less than a third of the extra cost of United Kingdom dollar imports.

09. The third factor is the effect of the Persian crisis and the serious worsening of our dollar invisibles account. Replacement from dollar sources of the loss of Persian supplies is estimated to cost over $300 million per annum. Though there will be some saving on expenditure in Persia, the net cost in dollars may well be between $200-300 million a year. Compared with 1950 this is the major change in the dollar invisibles account.

10. The fourth factor is the beginning of debt service on the U.S. and Canadian credits. This will cost some $174 million per annum, beginning at the end of 1951. The same figure has been allowed in 1952. (See Appendix A for details.)

11. The fifth factor is the big reduction in dollar capital inflow, mainly on short term account, from the high level reached in 1950. This inflow was partly speculative in character and necessarily temporary. Nevertheless it was an important factor in inflating the gold and dollar surplus and the reserves in 1950 and its non-recurrence worsens the final result in 1951/52 by some $200-300 million.

12. The sixth factor is the rise in dollar spending by the Rest of the Sterling Area countries, outstripping the increase in their dollar earnings. Compared with 1950, expenditure in the first half of 1951 by Rest of Sterling Area countries increased by about 50%. This is a trend which may be expected to continue. The estimates for 1951/52, in fact, imply an aggregate expenditure on imports from the dollar area (excluding Indian imports financed through the Grain Credit) amounting to approximately $1,200 million compared with $650 million in 1950. The influences behind this increase are similar to those affecting the United Kingdom; that is, higher prices, and increased requirements for stockpiling, expanding production, and in replacement of supplies which cannot be obtained elsewhere. There are as yet no signs that this increase is slowing up, though difficulties in procuring supplies from North America may be growing. Though earnings are expected to be greater in 1951/52 than in 1950 the total dollar surplus of the Rest of the Sterling Area is estimated at nearly $300 million less, primarily as a result of the rise in dollar expenditure. (Further details of the balance of payments of the Rest of Sterling Area with the dollar area are given in Appendix B.)

13. The seventh factor is the sharp deterioration in the United Kingdom position vis-a-vis other O.E.E.C. countries. In 1950 the U.K. net surplus in the Intra-European Payments Agreement and the European Payments Union amounted to £273 million. In the first quarter of this year the surplus was still large—£55 million. Since then there has been a rapid worsening of the position; the monthly figures have been as follows:

| Month | £ million | |-------|-----------| | April | 18 | | May | 10 | | June | 18 | | July | 43 | | August| 67 |

14. The factors responsible for this deterioration have much in common with those which have been influencing the dollar situation. In particular, there has been a rapid increase in United Kingdom imports, under the influence of higher prices and the measures of liberalisation which have been taken. In the second quarter of 1951 imports at about £240 million were over 70% above the quarterly average in 1950. An even greater increase has taken place in expenditure by the Rest of the Sterling Area. It is true that Sterling Area earnings, in particular from sales of the major raw materials produced in the Rest of the Sterling Area, also increased rapidly towards the end of 1950 and remained at a high level until the middle of this year. But the fall in prices in recent months will bite very severely into future earnings, while there is at present no sign that the upward trend in expenditure has been halted. In these circumstances a very substantial deficit in E.P.U. in 1951-52, of a minimum of £250 million, becomes a distinct possibility. Even this figure implies that the present increase in expenditure will tend to slacken, and presupposes no further reduction in Rest of Sterling Area export prices. In unfavourable circumstances the deficit might rise by between £100-200 million more. By the end of this month it is expected that the United Kingdom will have exhausted its credit balance in E.P.U. and will have repaid the £43 million in gold and dollars drawn in 1950-51. Thereafter the deficit will be met for a time by credit advanced by E.P.U. But the prospective deficit is so large that further payments in gold and dollars will almost certainly become necessary later in the year. The estimates, in the table in paragraph 4 above, allow for a notional loss of £50 million in the two halves of 1952, following the loss of £106 million in the present quarter of 1951. Clearly in some circumstances this loss might be substantially exceeded.
15. The eighth factor is the increase in prospective gold and dollar losses to non-dollar countries as a result of the weakening of the United Kingdom's overall balance of payments. In 1950 and early this year a scarcity of sterling resulted in substantial purchases against dollars (e.g. by Brazil, Japan etc.). These were large enough to offset the "normal" gold and dollar losses to countries such as Persia and the Netherlands West Indies in connection with the operations of the oil producing companies. The earlier purchases have now been largely sold back again, and the increasing availability of sterling resulting from the deterioration in our overall balance has greatly enhanced the risk that dollar settlements with various non-sterling area countries will have to be made to meet current balance of payments deficits. In particular, the Sterling Area position vis-a-vis Argentina, Finland and Eastern European countries generally is likely to be extremely difficult and may either involve dollar payment, or a risk to essential supplies, or the need to replace them from dollar sources. In the estimates above a general allowance has been made for the expected dollar losses in connection with these countries, amounting to some $100 million in 1951-52 and in 1952. (Details of these gold and dollar transactions with non-dollar countries are shown in Appendix C.)

Comparison between present estimates for 1951/52 and the earlier United Kingdom estimates submitted to N.A.T.O.

16. Compared with the situation envisaged in April, 1951, when the estimates for N.A.T.O. were compiled, the present calculations show a deterioration in the gold and dollar balance of over $1 billion, and a loss of reserves of $1.1 billion, against a hoped for gain of some $150 million - a difference of about $1 billion in the size of the reserves.

17. Some of the factors responsible for this worsened position have been mentioned above in the comparison between 1951-52 estimates and actual results in 1950, e.g. the loss of Persian oil, and the sharp deterioration in the U.K. position in E.P.U., as well as with a number of other non-sterling area countries. But the most important single factor in the changed outlook is the fall in prices of the major commodity exports from the Rest of the Sterling Area and the reduction in demand for wool, rubber and tin. Compared with prices in the middle of February, on which the estimates for N.A.T.O. were based, current prices have fallen by the following amounts:

- Wool (crossbred) ........... 50%
- Tin ................................ 45%
- Rubber .......................... 30%
- Cocoa ............................ 9%

These four commodities alone account for about 60% of the total earnings from exports of the Rest of the Sterling Area. It is difficult to estimate what the decline in prices so far means in terms of aggregate dollar earnings, but provisional calculations suggest that receipts by the Rest of the Sterling Area will be almost $250 million or nearly 25% less in the second half of 1951 than in the first half. Compared with the estimates in the N.A.T.O. submission, the reduction in 1951-52 is of about $400 million. Included in this figure is some allowance for a decline in expected demand for wool, rubber and tin, particularly for stockpiling purposes, compared with earlier views. 18. Other differences of less importance are (a) in the estimate for U.K. exports, where a rather more optimistic view is now taken of the prospect of dollar earnings (plus $160 million); and (b) in the estimate for N.D.A. receipts, where the original United Kingdom forecast included an allowance of $250 million for the estimated dollar cost of the additional defence programme, while the current estimates include a sum of only $60 million in respect of defence machine tools. The two differences are largely offsetting.

Comparison between the United Kingdom and official United States estimates

19. Most of the conclusions which emerge from the examination of the United Kingdom estimates apply with equal or even greater force to the official United States estimates of the probable position of the sterling area dollar accounts in 1951/52. In particular, the following points should be noted:

(a) The deficit on invisible account does not allow sufficiently for the loss of Persian oil.

(b) The R.S.A. and capital surplus is not dissimilar from the original U.K. estimate for N.A.T.O. and is thus very much over-stated.

(c) A large E.P.U. surplus is forecast, whereas there will have been losses of $106 million in the current quarter alone, and there may be further losses later in the year.

20. General conclusion on the position of the reserves

On the basis of the estimates put forward in this note, the United Kingdom's reserves, which will amount to approximately $3,100 million at the end of 1951, may fall to little over $2,000 million at the end of 1952. This will bring them, in absolute terms, back to little more than the level reached at the end of March, 1950. In terms of purchasing power, however, that is, after allowing for the rise in import prices which the United Kingdom must pay, amounting to some 60% over the past two years, reserves of $2,000 million will be no more than they were at the lowest point reached since the end of the war.

B. The Overall Balance of Payments

1. In 1950 the United Kingdom earned a surplus in its overall balance of payments of £229 million. In the second half of 1950 the surplus was running at the rate of £366 million a year. Only very provisional estimates are available so far for this year; these show that the surplus has given way to a deficit of approximately £200 million in the first six months, equivalent to a rate of £200 million a year and involving a deterioration within six months of £500-600 million per annum.

2. Moreover, the rate at which the deficit is currently running is such that in the second half of 1951 a big increase even over the large first half-year's deficit is virtually inevitable. The rise in import prices has recently been checked, while the continued (though slow) increase in export prices has continued. It is reasonable, therefore, to expect that the current alarming deficit will tend to diminish. But the volume of imports required to support increased production will increase; above all our export trade faces extreme difficulties in expanding beyond current levels as a result of shortages of raw materials and the diversion of capacity to defence production, particularly in the metal-using industries, which have provided half our exports in the recent past.

3. In these circumstances, and as long as import prices remain at approximately present levels a large deficit in the overall balance of payments appears inevitable. The table below shows the probable picture in 1951/52, together with a tentative projection for the year 1952. The essential factors on which these calculations for 1951/52 are based are as follows:

(i) **Imports (excluding stockpiling and defence equipment):**

- Increase over 1950: approx. 10% in volume, costing £300 million at 1951/52 prices
- 35-40% in average values costing £300 million

(ii) **Exports:**

- Increase over 1950: Volume by only 1-2%
- Average value by 25-30%.

(iii) **Invisibles:** Compared with 1950 there is only a small net decline in net earnings on invisible account in spite of necessary allowance for the effect of the loss of Persian oil and the need for replacing it from dollar sources. The assumption is that this replacement can in fact be made. A serious decline in United Kingdom sales to overseas markets would have a catastrophic effect on the balance of payments with a large number of countries, even though there might be some saving on dollar expenditure.

### United Kingdom Balance of Payments

| Year | 1950 | 1951 | 1952 | 1951/52 | 1952 | |------|------|------|------|---------|------| | | Year | 1st half | 2nd half | 1st half | Year | | Imports (incl. stockpiling) | 2,374 | 1,650 | 1,800 | 1,800 | 3,600 | 3,600 | | Exports (f.o.b) | 2,221 | 1,310 | 1,390 | 1,510 | 2,900 | 3,000 | | Invisibles (net) | £382 | £240 | £150 | £200 | £350 | £350 | | Current balance | £229 | -100 | -260 | -90 | -350 | -250 | | Exports and re-exports required to achieve current balance (apart from stockpiling) (approx.) | - | 1,400 | 1,600 | 1,550 | 3,150 | 3,250 | 4. Compared with the United Kingdom submission to N.T.C. in April this year the present estimates show an increase in the expected deficit in 1951/52 of £250 million. (£350 million compared with £100 million.) This difference can be explained as follows:

(i) Bigger expenditure on imports, mainly through higher prices - 150

(ii) Small net invisible earnings, including smaller receipts through A.M.P. which had been reckoned at £90 million and are now reckoned at about £20 million - 170

(iii) Offset by increased export earnings, entirely through higher prices - 70

Total change in estimated deficit - 250

5. The extremely tentative forecasts outlined above suggest that during 1951 and 1952 the United Kingdom's overall balance will be running a deficit of some £300 million a year with no appreciable trend towards improvement over the period. Even this conclusion, however, is dependent on the assumption that import prices show no further rise on present levels, and that the relief from the recent falls will be fully secured. It need hardly be said that a further significant increase resulting from the resumption of world inflationary pressure would have a most serious effect on the United Kingdom balance of payments. A further point which must be emphasised is the extreme uncertainty as to the possibility of achieving even the level of total exports postulated in the present forecasts. The impact of growing defence production has only just begun to make itself significantly felt on the engineering industry; there is an acute scarcity of steel in prospect; and the scope for expansion of exports of consumer goods in place of the raw materials, semi-manufactures, and many classes of metal products whose export is bound to be reduced has definite limits. Every effort must and will be made to secure this expansion, but the difficulties are formidable. In any case an increase in export earnings sufficient to achieve a balance in the United Kingdom's external accounts is, given the present and prospective level of import costs, beyond the range of likely possibility.

6. An overall United Kingdom deficit on the scale forecasts, associated with a formidable and, in the long run, insupportable deficit in the sterling area's gold and dollar accounts (of which it is to a large extent the cause) implies serious weakness in the United Kingdom's external position, both generally and in relation to a large number of countries and regions.

Treasury Chambers, S.W.1,

4TH SEPTEMBER, 1951.

## APPENDIX A

**SERVICE ON THE UNITED STATES AND CANADIAN LINES OF CREDIT ETC.**

| | Interest | Amortisation | Total | |----------------|----------|--------------|-------| | **End-1951** | | | | | Canadian | 22.5 | 13.3 | 35.8 | | (converted at 2.95) | | | | | U.S. Credit | 75.0 | 44.3 | 119.3 | | Lend-Lease Loan| 12.0 | 7.1 | 19.1 | | | 109.5 | 64.7 | 174.2 | | **End-1952** | | | | | Canadian Credit| 22.2 | 13.6 | 35.8 | | U.S. Credit | 74.1 | 45.2 | 119.3 | | Lend-Lease | 11.9 | 7.2 | 19.1 | | | 108.2 | 66.0 | 174.2 |

## APPENDIX B

### REST OF STERLING AREA BALANCE WITH DOLLAR AREA, 1950 TO 1952

| Year | 1st half | 2nd half | 1st half | Year | Year | |------|----------|----------|----------|------|------| | | Provisional | Forecast | Forecast | Forecast | Forecast | | 1950 | 522 | 406 | 455 | 515 | 970 | 1,055 | | 1951 | 724 | 628 | 500 | 550 | 1,050 | 1,050 | | 1952 | -59 | -122 | -32 | -45 | -77 | -100 | | 1951/2 | - | - | - | - | - | - | | 1952 | - | - | - | - | - | - |

### Independent Sterling Area (excluding South Africa and Irish Republic)

- **Imports**: 522, 406, 455, 515, 970, 1,055
- **Exports**: 724, 628, 500, 550, 1,050, 1,050
- **Other (net)**: -59, -122, -32, -45, -77, -100
- **Gold sales to U.K.**: 49, 12, 3, 10, 7, 20
- **Net surplus/deficit**: 192, 112, 10, -10, -85

### Dependent Overseas Territories

- **Imports**: 128, 84, 100, 120, 220, 250
- **Exports**: 564, 412, 300, 300, 600, 580
- **Other (net)**: -2, 30, 14, 15, 29, 35
- **Gold sales to U.K.**: 28, 13, 11, 15, 26, 30
- **Net surplus**: 466, 371, 225, 210, 435, 395

### South Africa and Irish Republic (net)

- **Imports**: 130, 73, 30, 30, 60, 60

### Total Rest of Sterling Area Surplus

- **Imports**: 788, 556, 265, 240, 505, 370
- **Exports**: 1,055, 1,050, 1,050, 1,050, 1,050, 1,050
- **Other (net)**: -100, -100, -100, -100, -100, -100
- **Gold sales to U.K.**: 20, 20, 20, 20, 20, 20
- **Net surplus/deficit**: 85, 85, 85, 85, 85, 85

(1) Excludes expenditure financed from grain credit to India ($200 million).

((\\neq) plus)

### APPENDIX C

**GOLD AND DOLLAR TRANSACTIONS WITH NON-DOLLAR COUNTRIES 1950 to 1952**

| Year | 1st half | 2nd half | 1st half | Year | Year | |------|----------|----------|----------|------|------| | 1950 | Provisional | Forecast | Forecast | Forecast | Forecast | | E.P.U. settlements | $13 | $93 | $106 | $50(1) | $156 | $100 | | Netherlands Antilles and other O.E.E.C. countries | $10 | $14 | $4 | $8 | $12 | $16 | | Persia | $51 | $33 | $18 | $18 | $18 | $18 | | Egypt | $12 | $1 | $57 | $8 | $65 | $16 | | Japan | $8 | $31 | $36 | $36 | $36 | $36 | | Other | $57 | $30 | $13 | $75 | $62 | $100 | | Total | $25 | $134 | $200 | $125 | $325 | $200 |

(1) Assuming a purely notional figure of $50 million a half-year for our gold loss to E.P.U.

\* = plus ANNEX II

01. We have furnished to the interested U.S. agencies a memorandum on the balance of payments of the United Kingdom and the sterling area. The estimates for 1951/52 in the memorandum are provisional and the projection throughout 1952 is hazardous. We are, however, proceeding with further analysis and refinement of the figures. Despite their limitations the forecasts clearly disclose a balance of payments situation which will put in jeopardy our economic stability and therefore our defence programme unless action to check these dangerous movements is speedily taken. In putting the dollar deficit of the sterling area at £1,100 million in 1952, we have in our view fully discounted temporary factors and exceptional payments. The difficulties now confronting us are likely to be prolonged, even as the burden of defence itself. The solution of this problem is a joint interest and calls for action by both the U.S. and the United Kingdom.

02. We shall, of course, do everything within our power and in concert with the other members of the sterling area to reduce the pressure on our balance of payments by increasing exports and reducing imports. The latter expedient is, we recognise, not a satisfactory course. Further, it should be realised that the room for manoeuvre here is not great. Appendix I shows that there is little scope for reductions in the level of consumption and stocks postulated in the balance of payments memorandum.

03. Fundamental damage would be done to our economy, our production and our defence effort, if we tried to close the balance of payments gaps solely by our own efforts, i.e. by restricting imports and increasing exports at the expense of defence and essential investments. Even if the action taken by all sides is both effective and immediate the reserves of the sterling area will nevertheless be considerably reduced before such action can have its impact. Our objective must be first to reduce very substantially the rate of decline and then as soon as possible to stabilise the position. We must aim at measures adequate when in full operation, to close as soon as possible the gap of £1,000 million or so, without lasting damage. We believe that by actions which we and the R.S.A. can take we can fill at best half this gap.

04. (a) We shall be approaching the U.S. Government about filling by end-item aid the equipment deficiencies in our present defence programme. The amount involved is between 1.5 and 2 billion pounds. The provision of this end-item aid will greatly strengthen our ability to play our part in the N.A.T.O. defence but will not of itself help in the solution of the problems set out above. We have, therefore, considered measures which the U.S. Government might take in order to help to fill the gap. There are two measures which are necessary in order to prevent our economic position as set out in our memorandum on the balance of payments, from deteriorating even further. These are set out in paragraphs 4 and 5. The measures set out in the succeeding paragraphs would make a positive contribution to improving the position. We realise, however, that changes in legislation may be required to carry them out. This emphasises the necessity for immediate action in fields not requiring new legislation.

05. **Steel.** In a separate note (Appendix II) we show that without an import of 800,000 tons of steel from U.S.A., the general balance of payments deficit in our memorandum would be increased by at least £165 million.

06. **Imports from the Sterling Area.** In the table on page 3 of our memorandum, we have already assumed large U.S. purchases of wool, tin and rubber at reasonable prices, i.e., wool sales of £258 million, rubber net £280 million, tin £115 million. Insofar as our dollar earnings from these exports to U.S. are smaller because of reduction in volume or price, the dollar picture presented in the memorandum will be worsened. The most important contribution, which the U.S. agencies can make here, would be to maintain a steady buying policy and by long-term contract or otherwise, to provide a reasonable stability of prices, whether in ordinary purchases or in purchases for stockpiling. It should be emphasised that the foregoing would be required merely to prevent the position from being no worse than that painted in our memorandum, and we would wish in discussions to verify that the assumptions on which our figures are based are in fact not over-optimistic. The U.S. could also help by removing restrictions in U.S. consumption of these sterling area commodities. A positive contribution towards closing the dollar gap would be made if the U.S. would increase the volume of its imports of such R.S.A. commodities as are readily available at reasonable prices for stockpiling.

07. **Off-shore Purchases from United Kingdom Production.** This could be the most efficient single method which U.S. might adopt to help us since the amounts involved are potentially very large. Significant assistance could be afforded to our balance of payments if the U.S. were to purchase for dollars some of the products inside the £2 billion production element in our defence programme and would firmly guarantee that these products would be turned over to the United Kingdom. In order that timely relief may be accorded to our balance of payments it would be necessary for some of the orders already placed in the United Kingdom (these amount to about £1,000 million out of the total of £2,000 million) to be taken over under the off-shore purchase procedure mentioned above. We suggest immediate study of the techniques and the amount of relief which can be obtained in this way for our balance of payments and for the preservation of our defence programme. If such off-shore purchases were related to production beyond the £2 billion production element in our current defence programme, this would involve further diversion of industrial capacity to defence. Such diversion would in no way improve our general balance of payments position; in fact it would lead inevitably to the same difficulties with which we were faced immediately after the last war.

08. **Additional end-item assistance from U.S. production.** This could be in relief of our existing defence production. The provision of additional end-item assistance in reduction of the £2 billion production element in our existing defence production programme could release part of our engineering industries to increase the volume of exports which are required if we are to attain the external balance essential to our defence programme.

09. **Off-shore Purchases by U.S. in Europe for the United Kingdom Defence Programme.** We have already placed in Europe orders for finished equipment and machine tools to a value of £40 million for our 4.7 defence programme. Our target expenditure in this sector was £50 million per annum, and subject to satisfactory financial arrangements there would no doubt be additional orders beyond the £40 million mentioned above. Our general and dollar balance of payments could be improved if the U.S. were willing to take over these European orders already placed and others that may with their agreement be placed and turn the goods over to the United Kingdom for its defence programme. If this procedure is accepted in principle, we suggest that examination of amounts and technique should proceed immediately. We would require arrangements to ensure that the goods would be reserved for the United Kingdom defence programme.

10. Cost of Works Services for U.S. Forces in the United Kingdom. The United Kingdom has agreed to pay 50% of the cost of certain specified projects in the United Kingdom for the U.S. Air Force and a rather higher proportion of the cost of the "Oxfordshire" airfields. Execution of these projects is spread over the period 1950/51 to 1953/4. The latest estimate of the total cost of this programme is £45 million of which, under existing arrangements, about one-half would fall upon the United Kingdom. Further projects of this kind estimated to cost a further £40 million are believed to be in contemplation. If the U.S. would pay the whole capital cost of these projects and subsequent maintenance costs we would thereby receive an immediate and continuing alleviation of our dollar problem. Such payments could presumably be made out of existing U.S. defence appropriations and would not now or hereafter create a demand on mutual security funds.

11. Stockpiling. Stockpiling of essential and bulky commodities on an adequate scale must form an integral part of any defence plan. The dollar component of our stockpiling programme in 1951/52 is £175 million and our overall imports for stockpiling in 1951/2 will be about £100 million. This is part of a 3-year stockpiling programme at present planned. Any reduction in it would not only seriously weaken our defence but would embarrass us and our allies in time of war by adding substantially to shipping difficulties. It is therefore suggested that the U.S. might consider financing the food and raw material stockpiling programme of the United Kingdom.

12. Extension of Scope of Mutual Security Aid. The disappearance of the A.M.P. procedure must, given the present balance of payments difficulties, reduce the ability of N.A.T.O. powers to carry out their defence programmes. The restoration of this procedure or greater flexibility in the military assistance programme (e.g. through a more flexible definition of end-item) would provide the possibility of financing the supply of dollar raw materials essential for defence production or other items of direct significance in the defence programme. Particular examples are steel, oil and machine tools.

13. Oil. Our military forces were, during the first half of 1951, consuming oil at an annual rate of £60 million worth. In the light of the Persian situation and the scale of our purchases of dollar oil, we suggest for consideration the possibility of U.S. providing equivalent aid. Relief of this kind could be made coterminous with the dollar loss occasioned by the Persian affair.

14. We would wish as a matter of urgency to pursue discussions of the suggestions in the foregoing paragraphs with the appropriate agencies of the U.S. Government. APPENDIX I

Over 1950 United Kingdom total stocks fell by 15%. In the first half of 1951 raw material stocks, including Government stockpiles, fell by a further 12% and food by 13%. It is conceivable that some of these reductions are counter-balanced by some increase in the stocks in the hands of manufacturers and retailers, but we have not been able to obtain any direct evidence of this. In the light of these movements, the volume of imports provided in the 1951/52 programme appears modest. In 1950 the decline in stocks of imported goods was equivalent to 6% of total imports. An increase of 6% was thus required simply to maintain consumption of imported commodities at the 1950 level. In addition the 1951/52 programme provides for a 5% net increase in commercial stocks of imported commodities. This, however, would do no more than bring them back to the end of 1950 level which was inadequate for efficient operation and distribution. In view of the recent trend of imported stocks, it seems unlikely that the programme of imports would in fact be sufficient to achieve this.

We do not know a great deal about the level of stocks in the R.S.A. but we have no reason to believe that they are unusually high.

The United Kingdom 1951/52 programme provides for consumption of imported food at the 1950 level only and involves a fall in the consumption of meat, eggs and tea. The recent reductions in the ration of sugar and cheese will also bring the consumption of these below the 1950 level. Although consumption did rise sharply in 1950, the level of consumption in the first half of 1951 was actually about 2% less than the average for 1950.

As far as raw materials are concerned, our import programme postulates no further depletion of stocks, but a modest restoration, including provision to deal with increased industrial production of about 4% over 1950.

Our total investment programme is no bigger than in 1950; it includes, however, a much larger defence component and hence implies a substantial reduction in civil investment.

To sum up, we are not programming for increased consumption or increased investment compared with 1950. The increase in commercial stocks is very modest and in the main, our increased production, for which additional imports are required, is being devoted primarily to defence.

APPENDIX II.

STEEL

The balance of payments estimates for 1951/52 and for the calendar year 1952 which have already been circulated, assume that the United Kingdom will at least be able to maintain through 1952 a volume of exports of engineering products in the widest sense (i.e., including broadly all products of the metal-using industries) equal to that in 1950. This will not be possible in 1952 unless total engineering output in that year is about 10% above that in 1950 by volume. This volume of engineering output in the wide sense used above cannot be achieved without steel supplies of 800,000 tons from the United States in addition to anticipated home production and other imports. In 1950 the United Kingdom gross output of metal goods was valued at £2,350 million. Of this defence took £165 million and exports £900 million, leaving £1,235 million for home civil use. In 1952 defence will require £500 million (at 1950 prices), i.e. £335 million more than in 1950. Assuming that the volume of exports is at the same figure as in 1950 and that total output is increased by £235 million home civil use will have to be reduced by £100 million. It should be emphasised that the maintenance of exports at this level will not ensure equilibrium in our balance of payments but will only suffice to hold the deficit at the figure indicated in the estimates already circulated. If the gross output of metal goods cannot be increased in 1952, the balance of payments position will be so much the worse.

The 1952 requirements of steel for purposes other than direct export are estimated at 11.3 million tons against which we should have, if the proposed imports from the U.S. are not secured, supplies of only 10.5 million tons. We must provide as a matter of priority, for increased requirements of certain basic industries (coal, electricity and transport), whose expansion is vital to industrial production as a whole, e.g. the coal industry will need 70,000 tons more in 1952 than in 1950. After allowing for these needs, it is estimated that the amounts available for the metal-using industries on the basis of a total supply of only 10.5 million tons will be so reduced that their output will fall by at least 2% instead of increasing by 10% as projected; and the amount of dislocation might be much greater.

If the output of metal-using industry were 2% less than in 1950, supplies of metal goods for export and home civil use, i.e., after deducting defence needs as estimated in paragraph 2, would be, not £100 million, as forecast there, but really £400 million less than in 1950. It would not be possible to deduct this wholly from home consumption, which of course includes a large proportion for industrial investment of all kinds. This has been under continuous restriction since the war through direct controls and the influence of taxation and these controls have now been restored to their full rigour. It would be dangerous to reduce the investment programme much below the level now planned. Exports would therefore have to take some part of the cuts and even if the fall in exports were limited to a third of the total short-fall, the cost to the overall balance of payments would be £150 million at 1950 prices, or £160 million at 1952 forecast prices. The figure might well be higher.

Thus if our requested imports of 800,000 tons of steel from the U.S. are not obtained, the United Kingdom overall balance of payments in 1952 will worsen by at least £160 million compared with the estimates already circulated. A large part of this would be reflected in our dollar deficit which would similarly also be substantially increased. There would be danger of grave dislocation of the defence programme.

It should be noted that the cost of the suggested imports of steel (estimated at £85,000,000) was by oversight omitted from the balance of payments calculations as circulated. ANNEX III

RESOLUTION FOR CO-ORDINATED ANALYSIS OF N.A.T.O. DEFENCE PLANS

(Approved by the Council at the meeting held on 19th September, 1951, at 5.15 p.m.)

THE NORTH ATLANTIC COUNCIL,

CONVINCED:

(1) That the creation of adequate strength, based on a sound economic foundation, to deter aggression and provide for the defence of the North Atlantic area requires the co-operative marshalling and most effective use of the resources of the N.A.T. countries:

(2) That there is required as an immediate next step an analysis of the issues involved in reconciling on the one hand the requirements of external security, in particular of fulfilling a militarily acceptable N.A.T.O. plan for the defence of Western Europe with, on the other hand, the realistic politico-economic capabilities of member countries,

(3) That such an analysis must not interfere with urgently required further steps to fulfil present national commitments for force contributions;

AGREES:

(1) That a temporary Committee of the Council be formed to carry out the analysis aforesaid and to submit to the Council its findings, including possible courses of action.

(2) That the Committee shall consist of individuals appointed by each of the member Governments who are either Ministers of, or closely related to the Government of their respective countries and who are particularly qualified for this special task. The Committee shall elect from among its members a Chairman and one or two Vice-Chairmen. An Executive Bureau will be formed; it will be composed of the Chairman, the Vice-Chairmen, and any other members whom the Committee may choose to appoint, if necessary, according to circumstances, with a view to expediting the work of the Commission.

(3) That the Committee shall be entitled to call for information, advice and assistance from all member Governments.

(4) That all military and civilian N.A.T.O. agencies are hereby directed to give the Committee such assistance as it shall require. Arrangements to this end may be worked out in consultation with the Council Deputies and the N.A.T.O. "ad hoc" Joint Working Group, and may include, for example, a statement by the responsible military agency, for planning purposes, of time-phased country-allocated force and infrastructure requirements for the defence of Western Europe; an examination of the organisation and equipment of basic national military units with regard to their contemplated roles in the defence of Western Europe, their training and operating requirements (including infrastructure) and the making of recommendations on economy measures to obtain effective military force requirements at minimum cost; a review of the production capabilities existing in the various countries so as to enable the supply of standardized or non-standardized military items for the equipment of necessary forces as expeditiously as possible and at minimum cost; the costing of defence requirements; and the analysis of production, financial and economic possibilities and implications.

(5) That the Committee shall make a progress report to the next meeting of the North Atlantic Council and should complete its analysis and report its findings to the Council not later than 1st December, 1951.

Parliament Buildings, Ottawa. CABINET

THE KING'S SPEECH ON THE PROROGATION OF PARLIAMENT

MEMORANDUM BY THE HOME SECRETARY

I circulate herewith, for consideration by the Cabinet, a draft of The King's Speech on the Prorogation of Parliament, which has been prepared following a meeting of the Committee on The King's Speeches appointed by the Prime Minister.

2. The Speech refers to about one-third of the legislation passed during the 1950-51 Session. The draft as it now stands contains 1,769 words. The number of words in the corresponding Prorogation Speech last year was 1,293. The number in the Prorogation Speech delivered at the close of the 1948-49 Session was 1,614.

J. C. E.

Home Office, S.W. 1, 25th September, 1951. ANNEX

DRAFT OF THE KING'S SPEECH ON THE PROROGATION OF PARLIAMENT, 1950-51 SESSION

MY LORDS AND MEMBERS OF THE HOUSE OF COMMONS:

My Government, in association with the other Governments signatory to the North Atlantic Treaty, having accepted the necessity for making greatly increased provision for defence, the consequent strengthening of My Forces is already becoming apparent. I pray that, with God's help, the defence programme will succeed in its purpose of averting war and laying the foundations of a lasting peace throughout the world.

My Government have watched with sympathy and interest the progress made in building up, within the wider framework of the North Atlantic partnership, a European community in which Germany will play her part. My Government desire to establish the closest possible association with this community at all stages in its development.

I welcome the appointment of General of the Army Eisenhower as Supreme Allied Commander, Europe. Units of My Forces have been placed under his command.

In order to increase the readiness of our defences, reservists of My Forces have been recalled for periods of training of between fifteen days and three months, and for periods of service amounting in some cases to eighteen months.

My Ministers have continued to give the fullest support to the United Nations in the maintenance of international peace and security.

It is My earnest hope that the efforts which are being made to restore peace in Korea will be successful. Under the United Nations My Forces have continued to take a prominent part in the arduous campaign in that country. The land forces from the various Commonwealth countries have been grouped together to form the First (Commonwealth) Division. The heroic action of the First Battalion, the Gloucester Regiment, maintained the highest traditions of My fighting services and has been justly acclaimed throughout the world.

My Government deeply regret that, although they made earnest efforts to find a basis for discussion, success did not attend the recent negotiations for a meeting of the Foreign Ministers of the Soviet Union, France, the United States and the United Kingdom.

My Ministers have tried to achieve by negotiation a solution of the unfortunate dispute which has arisen in connection with the oil industry in Iran, but these efforts, despite the help rendered by the special representative of the President of the United States, have so far been unsuccessful.

Together with the United States Government, My Government jointly sponsored the Treaty of Peace with Japan which was signed at San Francisco, on the 8th September, by forty-eight nations. The Treaty was the result of a prolonged series of international consultations in which My Government in the United Kingdom and My Governments in other Commonwealth countries had played a leading part.

In Malaya progress has been made in associating all communities with the administration of Government and in furthering their welfare and prosperity. With the assistance of the peoples of Malaya and the civil administration, My troops have, with increasing success, continued their efforts to restore law and order and to bring communist banditry to an end.

The Prime Ministers, or their representatives, from all the self-governing countries of the Commonwealth met in London in January last to review the international situation and to consider what further positive action Commonwealth Governments could take to secure and preserve world peace. Since then, Ministers from the United Kingdom, Australia, New Zealand, South Africa and Southern Rhodesia met in London to consider defence problems in regions of common concern, including the Middle East, and South African Ministers met with representatives of other interested Governments in Nairobi to consider defence facilities in Africa.

41256 The increase in production, which has been among the outstanding achievements of this country since the war, has continued in the face of many difficulties. For this success great credit is due to workpeople and management throughout the whole range of industry, agriculture and commerce. Despite the obstacles caused by shortages of materials and the high prices of many imports, full employment has been maintained, our exports have continued at a high level and the rearmament programme has been further advanced.

During the past session My Ministers were able to announce that, in agreement with the United States Government, it had been decided to suspend further allotments of Marshall Aid for which we owe a debt of gratitude to the people of the United States.

In order to restrain the rise in living costs provoked by high import prices, measures have been taken, by the operation of price control and otherwise, to limit the rise in the prices of goods and services made inevitable by advances in basic commodity prices, wages and other costs.

I regret that the balance of payments, which was remarkably favourable last year, has, largely because of higher import prices, become less favourable in recent months.

It gave me great pleasure to open in May last the Festival of Britain, in which the whole nation has displayed its talents and traditions in the arts and sciences. Despite the clouds which hang over the world, the celebrations throughout the land have been given a powerful stimulus to the arts of peace and have provided opportunity for well-earned recreation of spirit.

I am pleased that so many visitors from overseas have attended the Festival, which has thus contributed to international friendship and understanding.

I warmly welcomed the State visits of Her Majesty The Queen of the Netherlands and His Royal Highness Prince Bernhardt of the Netherlands, Their Majesties, The King and Queen of Denmark and His Majesty, The King of Norway.

My Ministers continue to attach importance to international co-operation and mutual aid in economic and social matters through the United Nations and other bodies. They were glad to welcome delegates from Commonwealth and foreign countries to the tariff negotiations which were held last winter in Torquay, and to participate with other Commonwealth Governments in the plans for the economic development of South and South-East Asia. My Government continue to collaborate fully in the work of the Organisation for European Economic Co-operation.

My Ministers were glad to be able to exchange views at a meeting in London with Ministers in other Commonwealth Governments concerned with the production of raw materials and the supply of manufactured goods, and in this connection to have the assistance of representatives from a number of Colonial territories.

My deep sympathy went out to My people in Jamaica when many parts of the island were devastated by a hurricane on the 17th August. My Ministers in the United Kingdom announced an immediate grant for relief.

I am glad that the health of My people has been well maintained. Great praise is due to all engaged in the Health Services who fought with considerable success an epidemic of influenza during the winter. I also rejoice that the death rate from tuberculosis has sharply declined.

MEMBERS OF THE HOUSE OF COMMONS:

I thank you for the provisions which you have made for the public services.

MY LORDS AND MEMBERS OF THE HOUSE OF COMMONS:

Thanks to the determination of farmers and workers throughout a trying season, the programme for the expansion of the production of food at home has been carried on with unabated vigour.

Legislation has been passed to establish a White Fish Authority with powers to reorganise, develop and regulate the White Fish Industry; and a new scheme has been approved conferring wider powers on the Herring Industry Board. An Act has been passed to extend the help given to farmers rearing livestock in upland areas.

My assent has also been given to a measure providing for the restoration to agriculture and other useful purposes of land broken up by the opencast working of ironstone.

New provisions have been enacted for maintaining or restoring the purity of the rivers and other inland or coastal waters. An Act has also been passed to increase the contributions which may be made from the Exchequer towards the cost of schemes for rural water supply and sewerage.

My Government were gratified by the response which they received to their appeal for extra output from the coal mines. Higher levels of industrial production have, however, greatly increased the demand for fuel and power; and My Ministers have taken, and will continue to take, all practicable steps to encourage the recruiting of more miners, to increase the supply of fuel, electricity and other forms of power and to ensure their more efficient use.

Both sides of industry have recognised the need to remove obstacles to increased production and, with the full agreement of employers and workpeople, provision has been made to postpone the restoration of pre-war trade practices in industry.

The war-time measures for the prevention and settlement of trade disputes have been withdrawn and replaced by provisions more appropriate to peace-time conditions.

Legislation which will be of great benefit to a large number of My People has been passed to augment retirement pensions and the provision for widowed mothers and for children under the National Insurance Acts. The National Assistance allowances paid to those in need have been increased and improvements made in certain supplementary allowances paid to war pensioners.

Increases have been granted in the retired pay and pensions of My Regular Forces.

An Act has been passed to safeguard the civil interests of My Reserve and Auxiliary Forces.

Provision has been made for the setting up of a Courts-Martial Appeal Court to hear appeals against convictions by courts-martial.

My Ministers have continued to develop the organisation of the Civil Defence Services and have been in consultation with representatives of industry and commerce about civil defence in industrial and commercial undertakings and with the associations of local authorities about the organisation of the fire services on a national basis in the event of war.

I gave My assent to legislation to make temporary provision for the protection of the occupiers of certain classes of leasehold property in Great Britain.

An Act was passed which extends the powers and duties of the Forestry Commissioners to establish and maintain adequate reserves of growing trees.

A Commission is being appointed to stimulate the more rapid expansion of cattle breeding and rearing in the Highlands of Scotland. An enquiry has been instituted into crofting conditions in the Highlands and Islands of Scotland.

A measure has been passed to provide more effective means for dealing with the poaching of salmon and trout in Scotland.

Further sums were made available for the development of the Colonial territories and the welfare of their peoples.

Progress has been made in the consolidation of the Statute Law.

I pray that the blessing of Almighty God may attend you. AGRICULTURAL WAGES AND PRICES

Memorandum by the Minister of Agriculture and Fisheries

The National Farmers' Union of England and Wales have announced in the Press and have given me advance notice of their intention to ask for a Special Price Review to meet the extra costs which will be incurred if the proposals of the English Agricultural Wages Board for an increase in the minimum rate of 8/- per week for men and 6/- per week for women with an additional five days annual holiday with pay are confirmed by the Board on 10th October.

2. They had previously (on 31st July) addressed formal representations to me about the heavy and continued rises in other costs since the last Annual Review in February which they claim will amount to £20 millions in a full year, of which £9½ millions will be due to an excess of increased costs of fertilisers over the sum anticipated and allowed for at the last Annual Review. In that communication they suggested that a course which would avoid further increases in the prices of agricultural products would be for the Government to reconsider their decision on the removal of the subsidy on fertilisers (which was discontinued after 1st July last).

3. The Scottish Agricultural Wages Board is meeting today (24th September) to consider a claim for corresponding increases in the minimum agricultural wage and additional holidays with pay. If - as is probable - similar awards are made in both Scotland and Northern Ireland the increased costs in the United Kingdom will be, on an annual basis, of the order of £20 millions.

4. In view of the terms of Section 2 of the Agriculture Act, 1947, and the agreed procedure, it would be difficult to contend that the prospective increase in labour costs and the unforeseen and substantial rise in prices of fertilisers were not sufficiently "sudden and substantial" to justify a Special Review. It would however be possible to reject as inadmissible for the purpose of a Special Review the aggregation of a number of lesser items of cost increases such as transport charges, petrol (owing to the Budget) amounting to £10½ millions.

5. The situation will obviously require very careful handling in view of the political position. Continued uncertainty about the result of the Union's application for a Special Price Review may result in a lower standard of cultivation this autumn (particularly as regards the use of fertilisers) with a consequent falling off in crop production in 1952. If therefore we take no action or reject the Union's application we shall be open to the charge of indifference to the future food supply, and the situation could clearly be exploited, particularly in the rural areas.

6. It might be possible and might indeed be desirable to negotiate a compromise with the Farmers' Unions under which in return for their waiving their claim for a Special Review with its consequent automatic effect on prices of agricultural products, the Government would reintroduce a subsidy on fertilisers which would take into account not only the current increased costs of fertilisers over and above the sum allowed at the last Annual Review (£9 4 million in a full year) but also the increased costs of production arising from higher wages if the provisional award is confirmed (about £20 million in a full year). An announcement of such a proposal during the next few weeks would, however, lay us open to the charge of offering a pre-election bribe to the farming community.

7. If the Agricultural Wages Board confirms its provisional award on the 10th October it might be possible to avoid serious trouble by an announcement that the Government is ready in principle to concede that a prima facie case for a Special Review exists. Discussions might then begin in the following week on the understanding that any decisions would have to be left to whatever Government is in office after the General Election.

8. The advantage of this course would be that we should be acting in accord with our existing undertakings to the agricultural industry while leaving any decision until the Election is over. On the whole I would recommend my colleagues to adopt this plan.

T.W.

Ministry of Agriculture and Fisheries, S.W.1.

24TH SEPTEMBER, 1951. SECRET C.P. (51) 254 COPY NO.\_\_\_\_\_ 25TH SEPTEMBER, 1951

CABINET

LOCOMOTIVE CONTRACT FOR PERSIA

Memorandum by the President of the Board of Trade

At the Cabinet's meeting on 4th September (C.M. (51) 58th Conclusions, Minute 3) the Secretary for Overseas Trade was asked to submit a report on the locomotive contract at present being executed by the Vulcan Foundry Co. for the Persian State Railways, with particular reference to the question whether any alternative markets could be found for the locomotives if, in the event, they were not sent to Persia.

2. The report which follows has been agreed between the Board of Trade and the Ministry of Supply and follows informal consultation with the Chairman of the Vulcan Foundry Co.

3. The Vulcan Foundry Co. is the second largest of eleven firms manufacturing steam locomotives in the United Kingdom. Its production is of very considerable importance, particularly in the export field. (The value of locomotive exports amounted to over £8 millions in 1950).

4. There are in fact two contracts with the Persian State Railways - one for 24 and one for 40 locomotives; the total value is approximately £2,130,000. The orders were secured in the face of severe competition, and followed direct intervention by the British Embassy in Tehran. The Persian State Railways have opened irrevocable credits in respect of both contracts which have been covered by the Export Credits Guarantee Department to the extent of 90 per cent of any loss (including loss arising from a refusal by the United Kingdom to issue export licences) which the exporters might sustain.

5. Approximately 10 per cent of the work on the contracts has already been completed, 20 per cent of the materials for the assembly, etc., of the locomotives has been received, and the remainder is on order and will be coming forward in the course of the next two or three months. First deliveries are due to start in February, 1952, and the whole order is expected to be complete in December, 1952.

6. If work on the contract is stopped, there will be the following consequences:

(a) There will be a very serious gap in production at the Company's works. Owing to the time required to make production plans, produce components and order the necessary materials, it would be ten to twelve months before the Company would be in a position to begin work on an appreciable scale on any other orders. The capacity freed by any stopping of the Persian Contracts could not be used in the meantime by the Company for other purposes and most of the material fabricated for the contract would have to be scrapped. The Company are most apprehensive - and with good reason - that if there were such a gap in their production programme they would lose to other heavy industries a substantial part of their labour force of about 2,700 skilled workers. It would be very difficult indeed to rebuild such a force. It follows that there would be a real risk of a prolonged break in the continuity of the Company's production capacity, which is regarded by the Ministry of Supply as of vital national importance for exports in peace and for the continued production of locomotives in war.

7. The locomotives are designed to operate under conditions existing in Persia and would require modifications to make them suitable for other railway systems. They are standard gauge, but the loading gauge would render them unsuitable for operation on British railways. Nearly all Colonial railways are non-standard gauge. The Company are, however, very hopeful that if the contract with Persia were frustrated it would be possible to sell the locomotives to Turkey or Yugoslavia, since they would be suitable for the conditions in those countries (subject to certain modifications, such as conversion to coal burning) while there would be the added attraction that (subject to the time taken to carry out the modifications) very early delivery could be offered. In this connection it is significant that the Government of Yugoslavia is thought to be about to invite tenders for the delivery of sixty locomotives and, if this proves to be the case, Vulcan's will themselves probably be submitting a tender.

8. In the light of the foregoing considerations and in view of the relatively favourable possibilities of alternative markets in Turkey or Yugoslavia, I have no hesitation in recommending - with the full concurrence of the Ministry of Supply - that the right course will be to authorise the Company to continue with the execution of the contract, notwithstanding the uncertainty of the situation in Persia. If between now and the end of the year a Persian Government came into power with which satisfactory relations could be established, we should presumably be glad to be able to let them have the locomotives in accordance with the contract terms; if there were not such a Government, then we should presumably have to consider frustrating the contract in which event, as I have indicated, there would be good hope that the locomotives might be sold to Turkey or Yugoslavia.

9. As our action in respect of other supplies has not unnaturally led to a certain amount of speculation among the workers at the Vulcan Foundry Co. as to the future of these contracts, it would be most desirable that a decision should be given as soon as possible and that the Company should be authorised to make it clear that His Majesty's Government had been consulted and had agreed that work on these contracts should proceed.

H.S.

Board of Trade, S.W.1.

25TH SEPTEMBER, 1951. CABINET

MANPOWER FOR THE MINES

MEMORANDUM BY THE MINISTER OF FUEL AND POWER

I have, at various times in recent months, pressed on my colleagues the urgent necessity of importing large coal for the house coal market.

2. After considerable discussion, it was agreed that we could buy Indian coal for gas works, thereby, perhaps, releasing some extra large coal for the housewife (this, unfortunately, is not certain as gas works stocks are still unsatisfactory) and that we might buy Polish coal, if political difficulties with the Poles could be eliminated.

3. I also proposed the purchase of a small quantity of dollar coal (perhaps a quarter of a million tons for delivery after Christmas).

4. Some Indian coal has been purchased but it is low grade, and it is doubtful whether the gas works can take more than 250,000 tons at the most.

If we could buy three-quarters of a million tons of Polish coal, and could get delivery fairly soon, the prospects for the house coal market would be greatly improved. Unfortunately, we seem no nearer to reaching a solution of political difficulties with the Poles than we were eight weeks ago.

5. The proposal to import dollar coal has been rejected.

6. This makes it essential for me to remind my colleagues that while householders with stocking space have bought a good deal more coal this summer, the merchants' stocks are not yet a million tons as against the two and a half million which we meant to have at the end of October; and that, in all probability, they will fall at least a million, if not a million and a quarter tons, below the safety figure.

7. I have taken every practicable step to restore the situation by increasing the manufacture of briquettes, diverting small coal from industry to the house coal market to the maximum amount which the merchants can take, &c.

8. But apart from dollar coal, there is, in my view, only one hope of averting a very serious crisis in the winter over household coal. That is to increase the manpower in the mines. By this I mean that the number of men in the mines should be increased by the end of the year by, if possible, 10,000. We achieved this result last winter and I believe we should be able to do it again.

9. I regard the following measures to this end as essential:

(a) Stopping wastage from the pits

Sir Hubert Houldsworth is already working on this with great energy and hopes for results. He is prepared to co-operate with the Ministry of Labour in the highest possible degree.

But it must be remembered that every industry has some wastage; that wastage from the coal industry is, in fact, much below the average wastage of other industries; that with the present high wages obtainable for light work in rearmament industries, considerable wastage may be quite inevitable; and that we must make this good by increased recruitment of people who are likely to stay in the industry. (b) Return of ex-miners from the Forces

One class of recruits who will stay in the mines are ex-miners who have volunteered on long-term engagements as regulars in the Armed Forces. Under the scheme approved in February last 2,400 have, so far, been released, and the number will, no doubt, rise to 3,000. This is the equivalent of 1 million tons of extra production per annum.

I estimate that there may be about 3,000 more miners who would come back to the mines if we now applied the scheme adopted in 1947. As the long-term situation of coal is certainly more serious than it was then, I urge that this should be done. Details are set out in Annex A (in particular, in paragraphs 7 et seq.)

(c) The Home Recruiting Campaign

The campaign decided on in July should be got into full swing and should be conducted with great vigour. The Ministry of Labour lent great assistance in the early part of the year. I believe the same success could be obtained now.

(d) Italians

The Minister of Labour has put forward new proposals for the reorganisation and acceleration of the recruitment of Italians. The Coal Board are prepared to co-operate in the fullest possible degree. I believe that the resistance of the rank and file of the National Union of Mineworkers (N.U.M.) can be overcome. We should aim at a great acceleration in the number of arrivals.

The prospects of success with N.U.M. Lodges will be much improved if the 1947 scheme for release of ex-miners from the Forces and the home recruiting campaign are both carried on with vigour.

10. Even if all this action succeeds, it may, in my view, still be necessary to import some dollar coal after Christmas. I state the case in Annex B.

P. J. N.-B.

Ministry of Fuel and Power, S.W. 1, 25th September, 1951.

ANNEX A

MANPOWER IN THE MINES

1. Between February 1949 and November 1950 manpower in the mines fell from 728,000 to 686,000. During November, December 1950 and January 1951 the Cabinet made a number of decisions which reversed this trend; between November 1950 and 30th April, 1951, manpower rose to 703,400. In May and June the figure at first remained stationary, and then fell slightly. In July and August it has fallen more sharply; and in the last 6 weeks it has fallen by 3,700 men. If this trend continues we should by the end of the year have no more miners than we had in November 1950.

2. The immediate prospect for coal supply is, in my view, less alarming than it was in 1947, except in regard to house coal, of which merchants' stocks are lower than they have ever been before. But the longer-term prospect is clearly worse; the difficulty of meeting the increasing demand over the next 2 or 3 years will be much more serious than the difficulty faced in 1947.

3. In due course the output of coal will be adequately increased by the mechanisation and reorganisation of the mines. But this process, while it can and will be accelerated, must take time; in the interval, the increase of output can only be obtained by increasing the number of miners. From the New Year we cannot expect a great gain over last year from extra Saturday working, as the miners began their increased effort in early January. The Cabinet must, therefore, be ready to take measures, however distasteful, which will bring more men to the mines.

4. Undoubtedly the large-scale introduction of Italians is one of the best hopes. But there has so far been vigorous resistance to the acceptance of Italians by the Lodges of the National Union of Mineworkers; and one of the arguments most freely used is that foreigners should not be introduced while there are trained men in the Armed Forces who want to come back to the pits. In two world wars we have brought home large numbers of men from the front line to dig coal. In 1947 we took virtually every miner out of the Forces. In February of this year the Cabinet accepted the principle that some of the men who had subsequently volunteered on regular engagements should be released. The restricted scheme then agreed to has brought in (to 22nd September) applications from 3,421 men, of whom 2,438 have so far been released. The scheme was limited to those who first enlisted on a normal regular engagement after 31st December, 1948. Men of the rank of sergeant or above, and men serving in the Japan or Korean war areas, were excluded.

5. The necessary instructions went out at the end of February and the numbers of men released were approximately:

- 300 by the end of April.
- 900 by the end of May.
- 1,600 by the end of June.
- 1,900 by the end of July.

Under the original scheme, the last date for application for release was 30th June, and the applications received for release naturally fell off in July, the releases in that month representing applications made earlier. The scheme was then extended (C.M. (51) 50) until 30th September, and since the notification of this extension was sent out in July, applications have been coming in in greater numbers; in August there were a further 360 releases, and so far in September 178.

6. It is not expected, however, that many more than about 3,000 men will be released, even under the extended scheme, which is due to terminate at the end of September, and thousands of ex-miners may remain in the forces either because the present scheme excluded them, or because they have not been sufficiently strongly urged to return to the industry.

7. I now propose that as in 1947 release should be offered to all other ranks still serving in the forces, in all countries who have previously worked for six months at a coal mine, whether below ground or, if they are willing in future to work below ground, on the surface.

8. I repeat that the manpower position in the pits is even graver than it was in the early part of 1947, when, at the meeting of the Fuel Committee on 7th March, the Prime Minister said that it was clearly desirable that ex-miners in the Forces should return to the mines if they wished to do so, irrespective of military commitments.

9. The proposed scheme would include the following categories:

(a) Regular soldiers, sailors and airmen (i) Serving their normal period of Colour Service; (ii) Serving on active service as Reservists.

(b) National Service Men (i) Serving the normal two years' period; (ii) Serving for an extended period.

10. The additional men brought within the release scheme would be:

(a) Sergeants and Warrant Officers everywhere. (b) Men serving in Korea and Japan. (c) Men with more than two years' service in the Forces. (d) Men with surface experience only. 11. In order to ensure that the proposed scheme shall fulfil its purpose, every ex-miner should have the scheme explained to him, and each man should be pressed to take advantage of it. The importance of this was stressed in a letter from the Ministry of Fuel and Power to the Prime Minister's Private Secretary on 12th March, 1947, as follows:

"The tone of the offer is most important and I should like to suggest that the Prime Minister should ask that the offer be presented, not as anything in the nature of a concession, but rather as an indication of the way in which the men concerned can best serve the national interest."

In a minute dated 14th March, 1947, addressed to the Minister of Defence, the Prime Minister said:

"The response to these offers will no doubt depend to a large extent on the tone in which they are made. It should be made clear to the men that in present circumstances it is definitely in the national interest that as many as possible should return to the mines, and arrangements should be made to ensure that all who respond are released immediately."

Conclusion

12.—(a) I would urge that the existing scheme, widened in scope as I have suggested in paragraph 7 above, should be extended after 30th September for a further period of 6 months, and that instructions on the lines of the Prime Minister's minute quoted above should be issued to all concerned in the Services. I attach equal importance to both points in the Prime Minister's minute, viz.:

(i) the clear explanation to the men that it is in the national interest that as many as possible should return to the mines; (ii) the immediate release of men who agree to return.

(b) I repeat that this decision would greatly help to secure the acceptance by the Miners' Lodges of increased numbers of Italians.

ANNEX B

HOUSE COAL SITUATION

1. The position as regards supplies of large coal is giving rise to most serious anxiety and shows every sign of becoming critical. The essential minimum support now being given to the gas works and the railways has produced a most serious deficiency of house coal, stocks of which amount to 967,000 tons. At this level they are over 600,000 tons less than a year ago and in fact lower than in any year since the war.

2. Since 1946 the position at the end of August has been as follows:

| Year | Tons, 000's | |------|-------------| | 1946 | 1,394 | | 1947 | 1,353 | | 1948 | 1,552 | | 1949 | 1,735 | | 1950 | 1,418 | | 1951 | 898 |

These figures, of course, reveal a most serious state of affairs bearing in mind that even with stocks up to twice as high as at present, we have had difficulty in getting through the winter without a breakdown, particularly last year.

3. The merchants report that the situation is already so bad that they are willing to buy untreated smalls rather than go without coal, and have strongly pressed me to make substantial quantities available. I consider it essential to meet this request even though untreated smalls are in 10 per cent. deficiency. A transfer of this kind to the house coal market is not practicable except at the expense of engineering and other industry, whose present stock position is fairly satisfactory, or of power stations, which I am most unwilling to touch, as the stock position is weaker and next winter's requirements are likely to be very heavy. I have given instructions, therefore, that as an emergency measure 150,000 tons of untreated smalls should be transferred from industry to the house coal market between now and end of October; I am informally consulting the F.B.I. and Industrial Coal Consumers' Council on this proposal.

4. This diversion is no more than a palliative. It is quite insufficient to make good the shortage of house coal but represents the most that it is possible to do with available British supplies. Even allowing for this addition the house coal deficit is likely to be over 1 million tons. Whether this relief can be continued during the winter without harm to the power stations or industry is at present conjectural: the winter budget prospects so far as I am able to gauge them now, suggest that this is doubtful. The diversion of large coal from the gas programme would be possible only if gas works stocks were to reach a level of five weeks, and their prospects of doing so appear at present to be poor.

5. As regards imports, the outlook for Polish coal is precarious, and although the Foreign Office are pressing the matter, it is impossible as yet to rely upon help from this source. The import of 250,000 tons of Indian coal already approved will help the gas works but we cannot yet assume that this will mean an equivalent relief to our house coal difficulties. I fully appreciate the strong objections on balance of payments, freight and shipping grounds to any import of American coal and recognise the bad effect which such imports would have on our European friends. I consider, however, that an increase in freight rates (if that should take place) may well be a less serious disaster than a breakdown of house coal supplies. Nor should it be assumed that other imports, even for instance iron ore, would necessarily be more important to us next winter than coal imports.

6. On present prospects the house coal situation after Christmas will be such that the import of 250,000 tons from the United States may be absolutely essential to lessen the risk of a breakdown. CABINET

PRESS ARTICLES AND INTERVIEWS BY MINISTERS

NOTE BY THE PRIME MINISTER

The normal rules governing Press articles and interviews by Ministers are set out in C.P. (49) 95, paragraphs 45-49, as follows:

"45. Ministers are precluded from journalism in any form; but this prohibition does not extend to authorship of writings of a literary, historical, scientific, philosophical or romantic character. For these there are abundant precedents.

46. This rule need not be interpreted as debarring Ministers from writing, on occasion, articles or letters to newspapers, in order to supplement the means already used for enlightening the public in regard to measures before Parliament and other administrative questions affecting the work of their Departments.

47. Should a Minister deem it necessary to write such an article, he should not accept payment if it is offered. In deciding whether to write an article he should bear in mind his obligations to Parliament. For example, he should be careful not to discuss a Bill before it has received its Second Reading in the House of Commons.

48. These rules govern dealings with the foreign as well as the home Press.

49. The granting of special interviews to individual Press representatives is a matter for the discretion of the Minister concerned. As a general rule, however, the same considerations should apply as for written articles, i.e., if granted, an interview should be confined to elucidating the policy or work of the Minister and Department concerned. The same considerations regarding obligations to Parliament also apply, and Ministers should bear in mind that an interview granted to a representative of a single newspaper or agency may arouse jealousy and thus hostility in the rest of the Press."

[P.T.O.]

41258 2. In present circumstances greater freedom may properly be allowed. Ministers may give interviews to the Press, and, in accordance with precedent, when Parliament has been dissolved they may also write articles in any newspapers in prosecution of the Government's aims, or in defence of its policy. No payment may, however, be received for such articles.

3. As soon as the Election is over the normal rules set out in paragraph 1 above will again apply.

C. R. A.

10 Downing Street, S.W. 1, 26th September, 1951. THE OIL DISPUTE WITH PERSIA

Memorandum by the Secretary of State for Foreign Affairs

The 1901 Concession

The original agreement for the exploitation of oil resources in South Persia was entered into between the Persian Government and Mr. W.K. D'Arcy on the 28th May, 1901. It included the following provisions:

(a) The exclusive right for 60 years to exploit petroleum throughout the Persian Empire, with the exception of five provinces in Northern Persia.

(b) On the date of the formation of the first exploitation company the Persian Government was to receive £20,000 in cash, £20,000 in paid up shares, and "annually a sum equal to sixteen per cent" of the Company's profits.

(c) On expiration of the concession all "materials, buildings, and apparatuses" of the company should become the property of the government.

2. Oil in commercial quantities was discovered at Masjid-i-Sulaiman in 1908, and the Anglo-Persian Oil Company (now the Anglo-Iranian Oil Company (A.I.O.C.)) took over Mr. D'Arcy's rights in 1909.

His Majesty's Government's relations with the A.I.O.C.

3. In 1914 an agreement was made between the Treasury and the Company which was directed to ensuring supplies of fuel oil for the Navy and to making sure that these supplies, which would be required in increasing quantities, were purchased by the Government at reasonable prices. His Majesty's Government subscribed to the Company a total of £2,200,000. They became entitled to appoint two Government Directors; and held by virtue of their capital subscription a majority of the share votes. (The situation at the present date is that His Majesty's Government has a majority share holding - 55.86% of the ordinary shares, and a majority also of votes - 52.55%.) The arrangement between Treasury and the Company conferred on the Government directors a right of veto which, however, the Government undertook not to exercise except in certain circumstances.

The 1933 Concession

4. The provision in the D'Arcy contract which provided that the Persian Government would receive a royalty defined as "16% of the net annual profits" proved periodically to be a source of differences of opinion as to its interpretation. The main feature of this method of payment was that the Persian income from oil was tied directly to trading results, and the slump of the early 1930's had its effect on Persia. The question was brought to a head in July, 1932, when it was announced that the Persian Government would receive only £307,000 in respect of royalty for the preceding year. (This sum compared with £1,288,000 in respect of 1930 which was paid on almost the same quantity of oil produced.)

5. The Persian Government's attack on the Company began with an organised and abusive press campaign. There were comparisons between the share due to the Persian Government by way of royalty and that due to the British Government by way of income tax and dividends.

6. The Company was accused of falsifying accounts and wilfully defrauding the Persian Treasury. In November, 1932, the Company's Manager in Persia was handed a Note by the Persian Government declaring the Concession cancelled on grounds of the Company's failure to accept modifications: and subsequently the Persian Minister for Foreign Affairs stated that the stipulations of the Concession were not in accord with the legitimate interests of Persia. The numerous complaints against the Company included accusations that the amount of royalty had been unfairly arrived at and that the Company had failed to exploit their concession areas fully.

7. His Majesty's Minister in Tehran informed the Persian Government that their action in cancelling the Concession was a wholly inadmissible breach of its terms and asked for an immediate withdrawal. As the Persian Government persisted in their refusal of this demand, His Majesty's Government on the 14th December submitted the matter to the Council of the League of Nations. Before the case was heard, however, the parties, while reserving their respective legal points of view, agreed to enter into a provisional arrangement to undertake negotiations for a new Concession.

8. On the 3rd April Sir John Cadman of the A.I.O.C. arrived in Tehran and negotiations were begun. The Persian Minister prepared a statement of their desiderata, which were considered fantastic in their scope. It was made clear that their proposals were entirely unacceptable and that no agreement could possibly be based on them. On the 21st April the Company submitted a memorandum, which was essentially a draft of a new Concession. The Ministers stated that an agreement on this basis was equally impossible. Sir John Cadman then asked for a farewell audience with the Shah, at which the latter consigned the Persian proposals to the wastepaper basket and virtually agreed to the Company's draft Concession contract, which was rapidly finalised and ratified on the 28th May.

9. This agreement embodied a new formula for royalties which henceforward could be calculated under three headings:

(i) a fixed sum per ton of oil exported or sold in Iran. This was to be 4s. per ton subject to adjustment to compensate the Government for any fluctuations in the value of English currency as compared with the value of gold in London, taking the 1933 price as par.

(ii) a sum varying between 6d. and 1s. per ton similarly adjusted in gold in consideration of exemption from Iranian taxation on the Company's operations. that the Persian income from oil was tied directly to trading results, and the slump of the early 1930's had its effect on Persia. The question was brought to a head in July, 1932, when it was announced that the Persian Government would receive only £307,000 in respect of royalty for the preceding year. (This sum compared with £1,288,000 in respect of 1930 which was paid on almost the same quantity of oil produced.)

5. The Persian Government's attack on the Company began with an organised and abusive press campaign. There were comparisons between the share due to the Persian Government by way of royalty and that due to the British Government by way of income tax and dividends.

6. The Company was accused of falsifying accounts and willfully defrauding the Persian Treasury. In November, 1932, the Company's Manager in Persia was handed a Note by the Persian Government declaring the Concession cancelled on grounds of the Company's failure to accept modifications: and subsequently the Persian Minister for Foreign Affairs stated that the stipulations of the Concession were not in accord with the legitimate interests of Persia. The numerous complaints against the Company included accusations that the amount of royalty had been unfairly arrived at and that the Company had failed to exploit their concession areas fully.

7. His Majesty's Minister in Tehran informed the Persian Government that their action in cancelling the Concession was a wholly inadmissible breach of its terms and asked for an immediate withdrawal. As the Persian Government persisted in their refusal of this demand, His Majesty's Government on the 14th December submitted the matter to the Council of the League of Nations. Before the case was heard, however, the parties, while reserving their respective legal points of view, agreed to enter into a provisional arrangement to undertake negotiations for a new Concession.

8. On the 3rd April Sir John Cadman of the A.I.O.C. arrived in Tehran and negotiations were begun. The Persian Minister prepared a statement of their desiderata, which were considered fantastic in their scope. It was made clear that their proposals were entirely unacceptable and that no agreement could possibly be based on them. On the 21st April the Company submitted a memorandum, which was essentially a draft of a new Concession. The Ministers stated that an agreement on this basis was equally impossible. Sir John Cadman then asked for a farewell audience with the Shah, at which the latter consigned the Persian proposals to the wastepaper basket and virtually agreed to the Company's draft Concession contract, which was rapidly finalised and ratified on the 28th May.

9. This agreement embodied a new formula for royalties which henceforward could be calculated under three headings:

(i) a fixed sum per ton of oil exported or sold in Iran. This was to be 4s. per ton subject to adjustment to compensate the Government for any fluctuations in the value of English currency as compared with the value of gold in London, taking the 1933 price as par.

(ii) a sum varying between 6d. and 1s. per ton similarly adjusted in gold in consideration of exemption from Iranian taxation on the Company's operations. a sum equal to 20% of any distribution of the Ordinary stockholders of the Company, whether as dividends or in relation to General Reserve, in excess of a certain minimum annual sum (£671,280).

10. In addition the Persian Government would be entitled to a sum equal to 20% of the difference between the Company's General Reserve at the end of the Concession and the General Reserve at 31st December, 1932. (N.B. These payments were not given a gold guarantee.)

11. The new formula was designed to relate income more or less to production, although item (iii) provided a means whereby the Persian Government was also in a position to participate in the Company's prosperity during good years: (i) and (ii) however, ensured that Persia did not suffer serious financial and material loss in bad years.

12. In August, 1933, identical letters were addressed by the United Kingdom and Persian Governments to the Registrar of the Permanent Court of International Justice bringing to the notice of the Court Article 22 of the Convention whereby the parties agreed in certain circumstances to have recourse to the good offices of the President (or Vice-President) of the Court in connection with the nomination of an umpire or sole arbitrator, and asking the Court to accept these functions. The Registrar of the Court replied that the Court saw no objection to their acceptance of these functions.

The Supplemental Oil Agreement, 1949

13. In the spring of 1948 the Prime Minister informed H.M. Ambassador that there was much criticism of the share which the Persian Government was receiving from the operation of A.I.O.C., as compared with the Governments of Venezuela and Iraq from the operations of their concessionary companies. He made it clear at the same time, however, that the Government was not demanding an alteration of the concession as a right. As a result the A.I.O.C. agreed to enter into negotiations with the Persian Government for a revision of some of the terms of the 1933 Concession. After a protracted and difficult negotiation (during which complaints were, inter alia, again made about the relative size of His Majesty's Government's receipts from the Company in the form of taxation) the document known as the Supplemental Oil Agreement was drawn up and signed by the Minister of Finance in July, 1949, subject to ratification by the Persian Majlis.

14. This agreement did not really alter the 1933 formula (see paragraph 9). Payments under item (i) were increased from 4s. to 6s. gold and under item (ii) to 1s. gold. Item (iii) was also altered in Persia's favour to provide for an immediate payment to the Government in respect of the sum standing at General Reserve at the 31st December, 1947, and further payments (equal to 20%) in respect of allocations to General Reserve thereafter. It was further provided that these payments should be entirely free from the effect of British Income Tax, and that the total annual payments in respect of dividend and allocation to General Reserve should be a minimum of £4,000,000.

15. If the agreement had been ratified the effect of these provisions would have been as follows:

| Year | Under Concession | Under Supplemental Oil Agreement | Difference | |------|------------------|----------------------------------|------------| | 1948 | £9.17m. | £23.76m. | £14.59m. | | 1949 | £13.5m. | £22.9m. | £9.41m. | | 1950 (Est.) | £16.0m. | £30.0m. | £14.0m. |

*Includes a payment of 55.09m. in respect of 1947.*

16. The Supplemental Agreement could be submitted to the Majlis in July, 1949, only just before the latter was prorogued, and was accordingly not voted upon. When a new Majlis was elected in September the Ministry of Finance urged upon the Company the necessity for revising the Agreement so as to make it more acceptable to the new Majlis. The Company replied that the Supplemental Oil Agreement was the result of long and difficult negotiations and they could not hold out any hope of amending it, and they pointed out that, in any case, the Majlis had not yet reached any decision on it. When Mansur became Prime Minister early in 1950, the Shah instructed him to get the Supplemental Agreement through the Majlis, but he was uncertain how to do so and, in the event, merely staved off the issue by presenting the Agreement to the newly-elected Majlis and allowing it to be referred to a special Commission of the Majlis which, though it was supposed to contain equal representation of the various fractions in the House, in fact contained 5 members of the National Front in its total membership of 18. Mansur later fell from office and was replaced by General Razmara.

The Razmara Episode

17. General Razmara had a reputation for strength, and from numerous interviews with H. M. Ambassador it appeared that he himself genuinely favoured the Supplemental Agreement, although he wished to see it modified in certain respects. His position vis-à-vis the Majlis was weakened by his unsuccessful attempts to promote legislation for administrative reform. He was reluctant to give the Supplemental Agreement his open support and his public references to it were in equivocal terms. The bill embodying the Agreement therefore remained with the Majlis Oil Commission which, in November, 1950, recommended to the Majlis that it did not sufficiently secure Persian interests. Razmara's Finance Minister was put up to make a belated defence of the Agreement and to withdraw it from the Majlis. His speech was criticised on all sides, and he was forced to resign; the Majlis later voted its approval of the Commission's report. At the end of the year, the National Front, with its handful of representatives in the Majlis, was energetically exploiting the situation, openly threatening the lives of anyone inside and outside the Majlis who favoured the Supplemental Agreement and - finally - raising the cry of nationalisation. This was taken up by student demonstrators organised by the National Front, and the Majlis Commission began to formulate proposals to this end.
18. If the agreement had been ratified the effect of these provisions would have been as follows:

| Year | Under 1933 Concession | Under Supplemental Oil Agreement | Difference | |------|-----------------------|----------------------------------|------------| | 1948 | £9.17m. | £23.76m. | £14.59m. | | 1949 | £13.5m. | £22.9m. | £9.4m. | | 1950 (Est.) | £16.0m. | £30.0m. | £14.0m. |

- Includes a payment of 55.09m. in respect of 1947.

16. The Supplemental Agreement could be submitted to the Majlis in July, 1949, only just before the latter was prorogued, and was accordingly not voted upon. When a new Majlis was elected in September the Ministry of Finance urged upon the Company the necessity for revising the Agreement so as to make it more acceptable to the new Majlis. The Company replied that the Supplemental Oil Agreement was the result of long and difficult negotiations and they could not hold out any hope of amending it, and they pointed out that, in any case, the Majlis had not yet reached any decision on it. When Mansur became Prime Minister early in 1950, the Shah instructed him to get the Supplemental Agreement through the Majlis, but he was uncertain how to do so and, in the event, merely staved off the issue by presenting the Agreement to the newly-elected Majlis and allowing it to be referred to a special Commission of the Majlis which, though it was supposed to contain equal representation of the various fractions in the House, in fact contained 5 members of the National Front in its total membership of 18. Mansur later fell from office and was replaced by General Razmara.

The Razmara Episode

17. General Razmara had a reputation for strength, and from numerous interviews with H.M. Ambassador it appeared that he himself genuinely favoured the Supplemental Agreement, although he wished to see it modified in certain respects. His position vis-à-vis the Majlis was weakened by his unsuccessful attempts to promote legislation for administrative reform. He was reluctant to give the Supplemental Agreement his open support and his public references to it were in equivocal terms. The bill embodying the Agreement therefore remained with the Majlis Oil Commission which, in November, 1950, recommended to the Majlis that it did not sufficiently secure Persian interests. Razmara's Finance Minister was put up to make a belated defence of the Agreement and to withdraw it from the Majlis. His speech was criticised on all sides, and he was forced to resign; the Majlis later voted its approval of the Commission's report. At the end of the year, the National Front, with its handful of representatives in the Majlis, was energetically exploiting the situation, openly threatening the lives of anyone inside and outside the Majlis who favoured the Supplemental Agreement and - finally - raising the cry of nationalisation. This was taken up by student demonstrators organised by the National Front, and the Majlis Commission began to formulate proposals to this end.
18. His Majesty's Government, who had hitherto confined their intervention in the matter to unofficial representation, felt that in the light of this direct threat to the Company's position they must take steps to make their position clear. Accordingly, in a Note Verbale dated 28th February, 1951, they informed the Persian Government that in their view the Company's concession agreement, under its Articles 21 and 26, could not legally be terminated by an act such as nationalisation, and added that the Company could not negotiate under threat of nationalisation. Meanwhile on 10th February the Company, in order to strengthen Razmara's hand, not only informed him that they were ready to negotiate an entirely new Agreement based on an equal sharing of profits but offered him substantial monetary support (£5 millions at once and £2 millions a month for ten months, all in advance of future royalties) in order to assist the Persian Government in their immediate financial difficulties. Razmara preferred, however, not to reveal this offer to the Oil Commission and the Majlis and attempted to avert a nationalisation resolution in another way. He appeared before the Oil Commission in order to deliver reports from Persian technical, financial and legal experts which were unfavourable to nationalisation. This action undoubtedly led to his assassination three days later.

Development of "nationalisation"

The Majlis resolution

19. After the assassination of the Prime Minister on the 7th March the Oil Commission lost no time in passing its resolution "accepting the proposal that oil should be nationalised throughout Persia" and requesting an extension of the Commissions mandated for two months for examination of the principle of nationalisation. The Majlis agreed to consider this resolution as a matter of "double urgency" and it was approved by both Houses by the 20th March.

20. On the 26th April, i.e. in considerably less than two months, Dr. Musaddiq, the Chairman of the Oil Commission suddenly called a meeting and expressed his intention of pressing for a decision on the question of nationalisation. The following day the Commission approved the text of a resolution onjoining the implementation of the "decision of the Houses of Parliament for oil nationalisation throughout the country" and setting out in 9 articles the method of implementation. Once again this resolution (the so-called "9-Point Law") was hustled through the Majlis and it received the approval of both Houses by the 30th April. The Shah promulgated the law on 2nd May.

Establishment of the Oil Board

21. The law provided for the setting-up "with a view to arranging the enforcement of the law" of a mixed Board composed of five senators and five deputies elected by either of the two Houses and a representative of the Minister of Finance. The final appointments took place on 15th May. At least five of the members were supporters of the National Front. The establishment of the "National Iranian Oil Company" followed and the Persian Government thereafter persisted in referring to the A.I.O.C. as "the former Company".

22. The position was clearly fraught with danger and since it was imperative that we should discuss with the Americans both the Persian situation itself and its manifold repercussions a party went to Washington early in April.

23. The Americans had not supported us in the past in our dealings with the Persians on oil. In Persia they had declared their neutrality in the matter, an attitude which the Persians interpreted as disapproval of our policy. To us they frequently criticised the Company's actions and attitude. They felt very satisfied with their own policy, exemplified by the 50/50 profit-sharing agreement concluded in Saudi Arabia and thought that we, on the other hand, were being slow and were not keeping up with the development of feeling in Persia. The talks in Washington in April failed to bring them solidly into line with us. It proved at the outset that they and we held widely differing views on the strength and nature of the demand for nationalisation in Persia. In their view, a "low bow to nationalisation" was needed if we were to have any hope of stabilising the situation. We thought that a solution based on equal sharing of profits was possible, and that greater capitulation would be regarded as a sign of weakness. Consequently although during the discussion the Americans were prepared to agree piecemeal with the United Kingdom's aims and objectives, including the fact that it was vital for the United Kingdom to retain effective control over Persian oil, they were not prepared to co-operate with us in attempting to reconcile our essential needs and Persian aspirations and independence in the shape of the minimum that need be given away during the negotiations. Thus, while they never expressed in detail precisely what would be involved in their own "low bow to nationalisation" the form of a proposal which was drawn up in London and Washington during the talks and which was handed to Hussein Ala on 26th April was not such as to induce them to give us their active support, and the most they would promise was benevolent neutrality.

The Musaddiq period

24. On the day that this proposal was made, however, the Oil Commission passed its second nationalisation resolution which was almost identical with the final nationalisation law (paragraph 20 above) and Hussein Ala resigned while this was before the Majlis because he could neither oppose it nor give his support. He was replaced by Dr. Musaddiq, somewhat to the surprise even of the Shah and Sayyid Zia, who had on the same day been discussing bringing the latter into power. On the day after his resignation the Company handed to him a protest against the Oil Commission's resolution.

25. The pace of events in Persia was now alarmingly swift. At this stage the Foreign Secretary on 1st May made a deliberately moderate statement in the House of Commons which briefly recounted the history of the Oil Concession since 1901, recapitulated the issues at stake and outlined the proposal (paragraph 23) which had been put to Hussein Ala. The statement ended by saying that we were still most anxious to settle the matter by negotiation but that we could not negotiate under duress.

26. On the following day, the Foreign Secretary sent for the Persian Ambassador and requested that the Persian Prime Minister should be asked to suspend action and allow time for discussion. The Foreign Secretary also said that we could not accept "unilateral action, which would have the effect of upsetting the Agreement of 1931".

27. On 8th May the Persian Government replied affirming their determination to proceed with the programme of nationalisation, but concluding with a statement that the "former oil company" would be invited in a few days to discuss the implementation of the law.

28. In response to this intransigent communication, it was decided that a very strongly worded Note should be sent to the Persian Government asking them to agree to negotiations and giving warning that a refusal to negotiate, or any attempt to proceed by unilateral action to the implementation of the recent legislation would have "the most serious consequences". A further attempt was also made to enlist American support. It was clear, however, from the State Department's reply that they were not prepared at this juncture to offer support in the use of force if the present Persian Government should refuse to negotiate, although they would be prepared to acquiesce in the use of force on our part either to protect British lives or in the event of a Communist coup in Persia.

Application to the Hague Court

29. At this point the Company served notice on the Persian Government that they wished the dispute to be submitted to arbitration in accordance with the terms of the 1931 Concession Agreement. The Persian Government rejected this request on the 26th May and demanded that the Company's representatives should attend meetings for the liquidation of the Company. The Company then applied under the terms of the 1935 Agreement to the President of the International Court at The Hague to appoint a sole arbitrator between themselves and the Persian Government. At the same time His Majesty's Government submitted the matter to The Hague Court as a dispute between the United Kingdom Government and the Persian Government.

The A.I.O.C. Mission

30. The Company sent out a delegation of Directors on the 11th June to try to convince the Persian Government of the consequences of their policy of immediate expropriation of the Company's installations in Persia and to offer an alternative that would give them money for their present needs, acceptance of the principle of nationalisation and a foundation for partnership in the future. After meetings at which the Persian Delegation proved completely intransigent, insisting that all proposals must be in accordance with the Nationalisation Law, the Company on the 19th June made an offer which provided for an immediate payment of £10,000,000 and a sum of £3,000,000 a month from July onwards during the period necessary to reach an arrangement. The offer also provided for the vesting of the Persian assets of the A.I.O.C. in the National Iranian Oil Company (N.I.O.C.) on condition that the latter would grant to a new company established by the A.I.O.C. the exclusive use of these assets. This offer was summarily turned down by the Persian Delegation on the ground that it was not consistent with the Nationalisation Law, and the Company Delegation returned to the United Kingdom.

31. In the meantime the general situation in Abadan and the oilfields area had been deteriorating. The temporary Board of Directors and the N.I.O.C. began to interfere in the A.I.O.C.'s operations and members of the Board delivered a series of inflammatory speeches. Moreover they issued instructions that the Masters of tankers carrying oil from Abadan would be required before sailing to give a receipt to the N.I.O.C. on its own form. As the Persians refused to allow a clause to be added to this receipt reserving the legal rights of the A.I.O.C., tanker Masters refused to sign. The A.I.O.C.'s General Manager was thereupon accused by the Persians of sabotage, and left the country as a Bill had been presented to the Majlis on the 21st June introducing the death penalty for such an offence; though after strong representations by His Majesty's Government and the United States Government Dr. Musaddiq announced that the Bill would be withdrawn. At the same time H.M.S. Mauritius was sent to Iraqi waters opposite Abadan and all women and children were evacuated from the oilfields and from Abadan.

32. On the 5th July the International Court made an Order calling upon the Persian Government and the A.I.O.C. to do nothing which would aggravate the dispute, the A.I.O.C. in the meantime to be permitted to carry on their industrial and commercial operations as they had been doing prior to the 1st May under the supervision of an Anglo-Persian Board with one neutral member. On the 7th July His Majesty's Government informed the Persian Government that they accepted the Court's Order in full. On the 9th July the Persian Government informed the Secretary-General of the United Nations that they rejected the Court's Order.

Lord Privy Seal's Mission

33. On the 8th July the President of the United States offered to send Mr. Averell Harriman to Persia to discuss the situation with Dr. Musaddiq, at the same time drawing attention to the International Court's Order and urging the Persian Government to treat it with all possible consideration. Mr. Harriman arrived in Tehran on the 15th July. In the course of discussions with Dr. Musaddiq he eventually on the 24th July persuaded the Persians to agree to open negotiations with the British Government on the basis of the following formula:

"In the case of the British Government, on behalf of the former Anglo-Iranian Oil Company, recognising the principle of the nationalisation of the oil industry in Persia, the Persian Government would be prepared to enter into negotiations with representatives of the British Government on behalf of the former Company."

While this formula seemed to offer a chance for negotiations, His Majesty's Government considered that it was unlikely that the negotiations would be fruitful unless the Persian Government first undertook to improve the conditions in South Persia which had deteriorated throughout the month of July.

4. A point had been reached by the middle of July at which it had been decided to withdraw the staff from the oilfields of Abadan, but the decision was suspended in deference to Mr. Harriman's views, as he considered that to do so would prejudice his chances of opening negotiations. Production at the refinery gradually decreased until on 31st July it ceased to operate because the storage tanks were full. On the 30th July the Prime Minister stated in the House of Commons that although there might have to be a withdrawal from the oil wells and from some parts of Abadan, it was His Majesty's Government's intention not to evacuate Abadan entirely. In confirming this statement in the House of Lords the Lord Chancellor added that His Majesty's Government accepted all the implications that follow from the decision. As a precautionary measure the Persian Gulf Squadron of three frigates was reinforced by four destroyers from the Mediterranean.

5. Meanwhile Mr. Harriman decided to fly to London to discuss the situation with His Majesty's Government and on his return, after further talks with Dr. Musaddiq, he was able to assure His Majesty's Government that the Persian Government recognised the necessity for improving the atmosphere, particularly in South Persia, and that the Persian Government had agreed to negotiate on the basis of the Law of 20th March, 1951 (paragraph 19) and would not insist on the application of the Nationalisation Law of 1st May (paragraph 20). It has subsequently become apparent from a speech of Dr. Musaddiq in the Majlis on 9th September that he only agreed to this formula because he was sure that negotiations would lead to no result.

6. After receiving these assurances, His Majesty's Government addressed to the Persian Government a note to which Mr. Harriman had agreed after consulting Dr. Musaddiq. This note accepted the formula mentioned in paragraph 35 above and pointed out that the negotiations could not be conducted in a satisfactory manner unless the present atmosphere was relieved. The note recognised on behalf of His Majesty's Government and of the Company the principle of the nationalisation of the oil industry in Persia. In their reply the Persian Government for their part recognised the need for creating the best possible atmosphere in the interests of the success of the negotiations. His Majesty's Government's mission, headed by Mr. Stokes, the Lord Privy Seal, left for Persia on 3rd August.

The 8-Point Proposals

7. Mr. Harriman and his advisers had endeavoured to prepare the way for the Lord Privy Seal's Mission by impressing upon the Persians their inability to market their own oil and appeared to have achieved some success. It was clear from the preliminary conversations that the Persians were awaiting a lead from the mission. Mr. Stokes therefore decided to put forward proposals (See Annex A) which, while offering the Persians nationalisation and the withdrawal of A.I.O.C. as such from Persia, were designed to ensure (a) efficient production of the oil, (b) a large offtake of oil, and (c) availability of a large quantity of oil to those British interests which have developed it. For the purpose of (a) it was essential to retain the British technical staff and to have a sound operating organisation, substantially under British control, in which the British technical staff could have confidence.

8. These proposals which were made on the 13th August have become known as the "8-Point proposals". While details of this scheme were subject to negotiation, it represented in broad outline the maximum concession to Persian demands consistent with a business-like solution of the problem.

9. The Persian Government refused to discuss these proposals but issued a statement in which they announced, quite wrongly, that the proposals did not conform to the formula on the basis of which negotiations had begun. They contended that, according to this formula, the only problems which could be discussed were:

(a) The purchase of oil to meet the United Kingdom's own requirements. (b) Examination of the compensation to be paid to the A.I.O.C. (c) The employment of British technicians by the N.I.O.C.

To confine the discussion to these three points meant in effect a reversion to the terms of the oil nationalisation law of 1st May, which we had made clear we could not accept as a basis for discussions. 40. During private negotiations with Mr. Stokes, Dr. Musaddiq appeared ready to discuss the formation of a purchasing organisation, but he insisted that the British and Persian staff in the industry should be employed under a direct contract with the M.I.O.C., and that there was, therefore, no room for the operating organisation. In an attempt to obtain agreement at least on this one essential point, the Lord Privy Seal, after withdrawing his 8-Point proposals, explored various other ways of retaining British management. It soon became clear that Dr. Musaddiq was not prepared to accept any of these and the Lord Privy Seal therefore decided to suspend negotiations and left for London on 23rd August. Mr. Harriman left two days later.

Events after the return of the Lord Privy Seal's Mission

41. With the withdrawal of the Lord Privy Seal's mission and of Mr. Harriman from Tehran, His Majesty's Government let it be known that they regarded the negotiations as suspended. It was hoped that Dr. Musaddiq would realise that he could not induce us to yield to his demands and that, if he wished for a solution which would enable the flow of oil from Persia to be resumed, he would have to come forward with constructive proposals on which negotiations could be resumed. In the event, finding himself under increasing attack from Opposition circles for failing to produce a solution of the oil dispute which would give Persia £30,000 a day (a sum he had often quoted in the past) and no doubt impelled to further action by the more extreme members of his entourage, Dr. Musaddiq in the course of an unusually intransigent speech in the Senate on 5th September, stated that if His Majesty's Government did not return a satisfactory answer within two weeks to his latest "proposals" the residence permits of the A.I.O.C. staff in Persia would be cancelled. In the face of this "ultimatum", and in order to strengthen the hands of those deputies in the Majlis who were showing opposition to Musaddiq, it was considered essential to make it clear to the Persian deputies and people that His Majesty's Government had abandoned hope of being able to reach a settlement with him, the implication being that if the Persians wanted a settlement it was for them to withdraw their confidence in Musaddiq and ensure his resignation. His Majesty's Government therefore announced on the 5th September that they regarded the negotiations between themselves and the Persian Government as definitely broken off.

42. It was decided on the 10th September to withdraw certain special benefits which had previously been given to Persia in view of the advantages to the United Kingdom economy deriving from Persian oil supplies. These measures, which were designed to protect the United Kingdom economy and were not retaliatory, limited Persia's facilities in the use of sterling and the purchase of certain scarce goods. As a corollary cargoes of scarce goods en route to Persia, amounting to 3,000 tons of railway track equipment and 3,000 tons of sugar, were requisitioned. The Persian Government's riposte to these measures was to withdraw permission from the British Bank of Iran and the Middle East to deal in foreign exchange.

43. Meanwhile, the A.I.O.C. had decided, with His Majesty's Government's approval, to cease paying their Persian staff in Abadan, save for some 7,000 workers who will be engaged on maintenance and other essential services, at the end of September.

44. In the belief that the Shah alone is capable of replacing Musaddiq with a more reasonable government with which we can negotiate, H.M. Ambassador at Tehran, under instructions, had an audience of the Shah on the 11th September, in which he reaffirmed His Majesty's belief that nothing was to be hoped for from the present Persian Government, and strongly urged that His Majesty should take steps to replace the present government with one better fitted to safeguard the country's real interests.

45. On the 12th September Dr. Musaddiq sent Mr. Harriman, for communication to His Majesty's Government, what he described as new proposals for the settlement of the oil dispute, which included the "ultimatum" in regard to the British staff referred to in paragraph 41 above. Mr. Harriman refused to pass on this communication, and in a firm reply pointed out that the so-called proposals were in some respects a retrogression from the attitude which Dr. Musaddiq had previously taken up, and that the issue of the "ultimatum" in regard to the British staff could only aggravate the situation.

46. The Shah, in a further conversation with Sir F. Shepherd on the 17th September, appeared more frightened of making a change of government than of letting Dr. Musaddiq remain in power, and therefore urged Sir F. Shepherd to have further discussions with Dr. Musaddiq, which Sir F. Shepherd declined to do. On the 19th September, as a result of this conversation, the Minister of Court brought H. M. Ambassador an unsigned and undated piece of paper, apparently emanating from Dr. Musaddiq, containing further suggestions for a settlement. These suggestions represented a slight advance on Dr. Musaddiq's previous offers, but were still wholly unsatisfactory in regard to the all-important question of the position of the British staff. Since it appeared that Dr. Musaddiq's principal object in putting forward these suggestions was to be able to say in the Majlis on the 23rd September that he was in negotiation with His Majesty's Government on the oil issue, His Majesty's Government at once announced that the proposals were unacceptable as a basis for negotiation.

47. On the 25th September the Persian Government announced, without any notification to His Majesty's Government, that the remaining British staff in Abadan would be given seven days' notice in which to quit the country. This step represented a final flouting by Dr. Musaddiq of the interim decision of the Hague Court and, unless rescinded, would clearly render far more difficult a solution of the dispute and would therefore hasten the economic collapse of Persia.

H. M.

Foreign Office, S. W. 1.

26TH SEPTEMBER, 1951. ANNEX A

OUTLINE OF SUGGESTIONS SUBMITTED TO THE PERSIAN DELEGATION ON 13TH AUGUST, 1951 BY THE BRITISH DELEGATION WITHOUT PREJUDICE TO ANY PARTY CONCERNED

1. A.I.O.C. will transfer to N.I.O.C. the whole of its installations, machinery, plant and stores in Iran. As regards the assets in southern Iran compensation by N.I.O.C. to A.I.O.C. would be included in the operating costs of the oil industry in the area. Compensation for the assets used in the past for distribution and marketing in Iran will be dealt with under the separate arrangements suggested in paragraph 7 below.

2. A Purchasing Organisation will be formed in order to provide the assured outlet for Iranian oil which is the only basis upon which an oil industry of the magnitude of that of Iran could hope to maintain itself. This will be done by means of a long term contract, say 25 years, with N.I.O.C. for the purchase f.o.b. of very large quantities of crude oil and products from southern Iran.

3. Apart from this arrangement N.I.O.C. would be able to make additional sale of oil subject to the normal commercial provision that such sales should be effected in such a way as not to prejudice the interests of the Purchasing Organisation.

4. The Purchasing Organisation under the agreement will be placing at the disposal of the N.I.O.C. a world-wide transportation and marketing service, including one of the largest tanker fleets in the world, and will be entering into firm commitments with its customers for the fulfilment of which it will be relying on Iranian oil. It will, therefore, as a matter of normal commercial practice, have to assure itself that oil in the necessary quantities and qualities will come forward at the times required. In order to secure this objective the Purchasing Organisation will agree with N.I.O.C. an Organisation which, under the authority of N.I.O.C. will manage on behalf of N.I.O.C. the operations of searching for, producing, transporting, refining and loading oil within the area. The Purchasing Organisation will arrange from current proceeds the finance necessary to cover operating expenses.

5. In order that the proposed Purchasing Organisation can be induced to commit itself to the purchase of large quantities of Iranian oil over a long period of years, the commercial terms must be not less advantageous than the Purchasing Organisation would secure elsewhere either by purchase or development. In effect this means that the Purchasing Organisation would buy the oil from N.I.O.C. at commercial prices f.o.b. Iran less a price discount equal in the aggregate to the profit remaining to N.I.O.C. after allowing for the discount and for the costs of making the oil available to the Purchasing Organisation.

6. In the event of the foregoing suggestions being accepted by the Iranian Government as a basis for the future operation of the oil industry in southern Iran it is suggested that they should be expanded into the Heads of an Agreement which could later be developed into a detailed purchasing arrangement between the Iranian Government and the proposed Purchasing Organisation. The Heads of Agreement would also provide for the immediate resumption of operations in southern Iran on an interim basis.

7. It is suggested that all the assets owned by the Kermanshah Petroleum Company Limited which produces and refines oil for consumption in Iran, together with the installations, machinery, plant and moveable assets of A.I.O.C. which have been used in the past for distribution and marketing of refined products within Iran, should be transferred to the Iranian Government on favourable terms.

8. There will be Iranian representation on the board of directors (or its equivalent) of the Operating Organisation, which will, of course, only employ non-Iranian staff to the extent that it finds it necessary to do so for the efficiency of its operations. It will also offer its full co-operation to N.I.O.C., in any programme or training on which the latter may wish to embark.

NEWS DEPARTMENT 16th August, 1951. CABINET

USE OF OFFICIAL TRANSPORT FACILITIES DURING THE GENERAL ELECTION

NOTE BY THE PRIME MINISTER

Official Cars

1. Ministers' official cars or cars from the Official Car Service pool should not be used, even on repayment, for journeys connected with the Election, nor should they be used at all in a Minister's constituency.

2. Official cars may continue to be used for official engagements. This would include the case of a Minister unexpectedly recalled from his constituency for urgent official business.

Aircraft

3. Service aircraft should not be used for journeys on Election business.

4. Civil aircraft should not be paid for from public funds if used for journeys on Election or other Party political business; but exceptionally a Minister recalled unexpectedly to his Department for urgent official business may claim repayment of the cost of an air journey if no other means of transport would meet the case.

C. R. A.

10, Downing Street, S.W.1, 27th September, 1951. SECRET C.P.(51)259

2ND OCTOBER, 1951

CABINET

THE KING'S SPEECH ON THE PROROGATION OF PARLIAMENT

Memorandum by the Prime Minister

I circulate herewith, for the information of my colleagues, the revised text of The King's Speech on the Prorogation of Parliament, prepared in the light of the discussion at the meeting of the Cabinet on 27th October (C.M.(51)60th Conclusions, Minute 7).

C.R.A.

10, Downing Street, S.W.1.

2ND OCTOBER, 1951. THE KING'S SPEECH ON THE PROROGATION OF PARLIAMENT, 1950-51 SESSION

MY LORDS AND MEMBERS OF THE HOUSE OF COMMONS:

My Ministers have continued to give the fullest support to the United Nations in the maintenance of international peace and security.

It is My earnest hope that the efforts which are being made to restore peace in Korea will be successful. Under the United Nations My Forces have continued to take a prominent part in the arduous campaign in that country. The land forces from the various Commonwealth countries have been grouped together to form the First (Commonwealth) Division. The heroic action of the First Battalion, the Gloucester Regiment, maintained the highest traditions of My fighting services and has been justly acclaimed throughout the world.

My Ministers deeply regret that, although they made earnest efforts to find a basis for discussion, success did not attend the recent negotiations for a meeting of the Foreign Ministers of the Soviet Union, France, the United States and the United Kingdom.

My Government, in association with the other Governments signatory to the North Atlantic Treaty, have accepted the necessity for making greatly increased provision for defence, and the consequent strengthening of My Forces is already becoming apparent. I pray that, with God's help, the defence programme will succeed in its purpose of averting war and laying the foundations of a lasting peace throughout the world.

My Government have watched with sympathy and interest the progress made in building up, within the wider framework of the North Atlantic partnership, a European community in which Germany will play her part. My Government desire to establish a close association with this community at all stages of its development.

I welcome the appointment of General of the Army Eisenhower as Supreme Allied Commander, Europe. Units of My Forces have been placed under his command.

In order to increase the readiness of our defences, members of My Reserve and Auxiliary Forces have been recalled for periods of training of between fifteen days and three months, and for periods of service amounting in some cases to eighteen months.

My Ministers have tried to achieve by negotiation a solution of the unfortunate dispute which has arisen in connection with the oil industry in Iran, but these efforts, despite the help rendered by the President of the United States and his special representative, have so far been unsuccessful.

My Government, jointly with the Government of the United States, sponsored the Treaty of Peace with Japan which was signed by forty-eight nations at San Francisco on the 8th September. The Treaty was the result of a prolonged series of international consultations in which My Government in the United Kingdom and My Governments in other Commonwealth countries had played a leading part.

In Malaya further progress has been made in associating all communities with the administration of government and in furthering their welfare and prosperity. With the assistance of the peoples of Malaya and the civil administration, My troops have, with increasing success, continued their efforts to restore law and order and to bring communist banditry to an end.

The Prime Ministers of all the self-governing countries of the Commonwealth, or their representatives, met in London in January last to review the international situation and to consider what further positive action Commonwealth Governments could take to secure and preserve world peace. Since then, Ministers from the United Kingdom, Australia, New Zealand, South Africa and Southern Rhodesia have met in London to consider defence problems in regions of common concern, including the Middle East, and South African Ministers have met representatives of other interested Governments in Nairobi to consider defence facilities in Africa. The increase in production, which has been among the outstanding achievements of this country since the war, has continued in the face of many difficulties. For this success great credit is due to workpeople and management throughout the whole range of industry, agriculture and commerce. Despite the obstacles caused by shortages of materials and the high prices of many imports, full employment has been maintained, our exports have continued at a high level and the rearmament programme has been further advanced.

During the past session My Ministers were able to announce that, in agreement with the United States Government, it had been decided to suspend further allotments of Marshall Aid which had been so generously given to us by the people of the United States.

In order to restrain the rise in living costs provoked by high import prices, measures have been taken, by the operation of price control and otherwise, to limit the rise in the prices of goods and services.

I regret that, largely because of higher import prices, the balance of payments, which was remarkably favourable last year, has become less favourable in recent months.

I warmly welcomed the State visits of Her Majesty The Queen of the Netherlands and His Royal Highness Prince Bernhard of the Netherlands, Their Majesties The King and Queen of Denmark and His Majesty The King of Norway.

It gave me great pleasure to open in May last the Festival of Britain, in which the whole nation has displayed its talents and traditions in the arts and sciences. Despite the clouds which hang over the world, the celebrations throughout the land have given a powerful stimulus to the arts of peace and have provided opportunity for well-earned recreation of spirit. I am pleased that so many visitors from overseas have attended the Festival, which has thus contributed to international friendship and understanding.

My Ministers continue to attach importance to international co-operation and mutual aid in economic and social matters through the United Nations and other bodies. They welcomed delegates from Commonwealth and foreign countries to the tariff negotiations which were held last winter in Torquay, and have participated with other Commonwealth Governments in the plans for the economic development of South and South-East Asia. My Government continue to collaborate fully in the work of the Organisation for European Economic Co-operation.

My Ministers were glad to be able to exchange views at a meeting in London with My Ministers in other Commonwealth Governments concerned with the production of raw materials and the supply of manufactured goods, and to have the assistance of representatives from a number of Colonial territories in these deliberations.

My deep sympathy went out to My people in Jamaica when many parts of the island were devastated by a hurricane on the 17th August. My Ministers in the United Kingdom announced an immediate grant for relief.

MEMBERS OF THE HOUSE OF COMMONS: I thank you for the provision which you have made for the public services.

MY LORDS AND MEMBERS OF THE HOUSE OF COMMONS: Thanks to the determination of farmers and agricultural workers throughout a trying season, the programme for the expansion of the production of food at home has been carried on with unabated vigour.

An Act has been passed to extend the help given to farmers rearing livestock in upland areas.

My assent has also been given to a measure providing for the restoration to agriculture and other useful purposes of land broken up by the opencast working of ironstone.

Legislation has been passed to establish a White Fish Authority with powers to reorganise, develop and regulate the white fish industry; and a new scheme has been approved conferring wider powers on the Herring Industry Board. New provisions have been enacted for ensuring the purity of the rivers and other inland or coastal waters. An Act has also been passed to increase the contributions which may be made from the Exchequer towards the cost of schemes for rural water supply and sewerage.

My Government were gratified by the response which they received to their appeal for extra output from the coal mines. Higher levels of industrial production have, however, greatly increased the demand for fuel and power; and My Ministers have taken, and will continue to take, all practicable steps to encourage the recruiting of more miners, and to increase the supply of fuel, electricity and other forms of power and ensure their more efficient use.

Both sides of industry have recognised the need to remove obstacles to increased production and, with the full agreement of employers and workpeople, provision has been made to postpone the restoration of pre-war trade practices in industry.

The war-time measures for the prevention and settlement of trade disputes have been withdrawn and replaced by provisions more appropriate to peace-time conditions.

Legislation which will be of great benefit to a large number of My People has been passed to augment retirement pensions and the provision for widowed mothers and for children under the National Insurance Acts. National Assistance scales have been increased and improvements made in certain supplementary allowances paid to war pensioners.

Increases have been granted in the retired pay and pensions of My Regular Forces.

An Act has been passed to safeguard the civil interests of My Reserve and Auxiliary Forces.

Provision has been made for the setting up of a Courts-Martial Appeal Court to hear appeals against convictions by courts-martial.

My Ministers have continued to develop the organisation of the Civil Defence Services and have been in consultation with representatives of industry and commerce about civil defence in industrial and commercial undertakings.

I gave My assent to legislation to make temporary provision for the protection of the occupiers of certain classes of leasehold property in Great Britain.

An Act was passed which extends the powers and duties of the Forestry Commissioners to establish and maintain adequate reserves of growing trees.

A measure has been passed to provide more effective means of dealing with the poaching of salmon and trout in Scotland.

Further sums were made available for the development of the Colonial territories and the welfare of My peoples there.

Progress has been made in the consolidation of the Statute Law.

I pray that the blessing of Almighty God may attend you. CABINET

FUTURE OF THE SOUTH BANK SITE

Memorandum by the Lord Privy Seal

I recently circulated to the Prime Minister and to those of my colleagues principally concerned a report by a working party of officials on the winding up of the South Bank Exhibition, and the use of the site until work begins on the long-term developments which have already been planned by the London County Council with the agreement of the Ministry of Local Government and Planning.

2. The report by officials has been generally agreed, subject to one major issue which I discuss in the following paragraphs and to certain minor changes which in general I am willing to accept, and this being so I am availing myself of the authority which the Prime Minister has given for its agreed recommendations to be implemented.

3. There is, however, one point of policy on which I must seek a decision by my colleagues. The working party recommended that the major part of the section of the site upstream of Charing Cross railway bridge which has been earmarked in the long-term plan for new Government buildings should be handed over to the Ministry of Works as soon as exhibits have been removed from the Festival buildings - which should be by the end of December at latest - in order that they can proceed at once with certain urgent defence work which will eventually form part of the permanent Government building.

4. I disagree with this recommendation on three grounds:-

First, I think now that it would be a mistake to proceed with the idea of a Government building on the South Bank site;

Secondly, even if the policy of erecting a large Government office on the South Bank is re-affirmed I think it is rash, in the light of the New Colonial Office episode, to start excavation work until full plans for the scheme have been published and are known to be acceptable to public opinion, and

Thirdly, I fear that in practice there will be a long interval after the excavations and before the superstructure of the building can proceed during which the site will be closed to the public and will remain an eyesore.

5. The Minister of Works is unable to accept my views on this and I must therefore invite the Cabinet to adjudicate between us.

6. I hope that the Cabinet will invite the Minister of Works to re-examine with the Chancellor of the Exchequer and the Minister of Local Government and Planning and myself, and with the London County Council, the possibility of finding some other site for this Government office and releasing this part of the South Bank for cultural uses.

7. If, however, the Cabinet decide that the previous decisions (the latest of which is L.P. (48) 15th Meeting, Minute 2) should stand, I would still urge that the Minister of Works, before he begins operations on the site, should first prepare and make available for public criticism a complete architectural plan, and should produce evidence that the plan can be completed without serious risk of interruption.

R. R. C.

Office of the Lord Privy Seal,

1ST OCTOBER, 1951. CABINET

GENERAL ELECTION: ENQUIRIES BY CANDIDATES

NOTE BY THE PRIME MINISTER

Departments need guidance on the extent to which they should meet requests for information from Parliamentary candidates or their agents.

Factual information should be provided if it is readily available and is not confidential. In deciding whether information is readily available, a useful criterion is whether the information would be assembled for a Minister for the purpose of replying to a Parliamentary Question.

Local and regional offices should deal on this basis with any enquiries addressed to them; but they should refer doubtful cases to the headquarters of their Department for decision.

C. R. A.

10 Downing Street, S.W. 1, 2nd October, 1951 CABINET

MAN-POWER: MEASURES TO DEAL WITH LABOUR SUPPLY

MEMORANDUM BY THE MINISTER OF LABOUR AND NATIONAL SERVICE

I.—Summary

The aim of this memorandum is to review briefly our man-power situation and to propose measures for allocating to defence, export, and other essential production and services the supplies of labour to be released as a result of proposals at present under consideration and from other sources.

2. The facts of the situation are—

(a) we are faced with an additional demand of between 500,000 and 600,000 workers for defence, His Majesty's Forces, and essential industries and services, and this at a time when the general pressure of demand for labour is very high;

(b) we must hope towards the end of the period for some decrease in the numbers unemployed when the re-deployment of labour is complete and we may hope for some increase in the total working population which may range between 200,000-300,000;

(c) there should also be some easement in the competitive demand from less essential manufacture when raw material shortages begin to take effect, and if public feeling is aroused some increase in voluntary movement from less essential employment to defence, export and other essential production;

(d) the incidence of the demand falls unevenly between different parts of the country and thus intensifies the difficulty of ensuring that all the resources of labour available can be concentrated to meet the essential demands;

(e) no mere arithmetical closing of the gap will solve the labour supply problem.

3. The measures already taken are not sufficient to deal with the situation and it is essential that less essential production should be cut. On the assumption that this will be done by means of production controls, I propose—

(1) the revival on a limited scale of a system of labour supply inspection to examine the use made by employers of their labour, particularly skilled workers;

(2) that approval should be given to the opening of negotiations with the British Employers' Confederation and the Trades Union Congress with a view to introducing a Regulation of Engagement Order under which the employer would have a legal obligation placed upon him not to obtain his workers otherwise than through an Employment Exchange. The main object of this Order would be to make all workers seeking employment come to the Employment Exchange where they would be informed of the important vacancies and persuasion, not compulsion, used to get them to take these vacancies. II.—The Present Position

4. Our total working population has been increasing in recent years and is now greater than at any other date in peacetime. As is shown in the table below, there are now nearly 1 million more persons in the working population compared with 1939. In addition, the numbers registered as unemployed are over 1 million less than in 1939. There are, therefore, 2 million more persons in civil employment or in the Forces compared with pre-war.

Broad Changes in Distribution of Man-power between mid-1939 and mid-1951

(Thousands)

| Increases | Decreases | |-----------|-----------| | Metals, engineering and vehicles | +900 | Distributive trades | -400 | | Public administration | +725 | Textiles and clothing | -150 | | Basic industries and services (excluding mining) | +400 | Other services | -50 | | Chemicals | +125 | Coalmining | -25 | | Other manufacturing industries (excluding textiles and clothing) | +125 | Other mining and quarrying | -25 | | Building and contracting | +50 |

Civil employment | +1,675 | Registered unemployment | -1,075 | His Majesty's Forces (including those on release leave) | +350 |

Total working population | +950 |

5. In spite of the increased numbers at work, the total of vacancies notified to Employment Exchanges which were outstanding at 1st August, was 489,000 (the highest August figure since 1947) compared with 380,000 a year ago. During the first seven months of this year, the number of outstanding vacancies increased by 142,000; in the corresponding period last year the increase was only 34,000. In the engineering industries, which are the ones most affected by rearmament, although the number of workers has increased by about 100,000 in the last twelve months, outstanding vacancies have also increased by 34,000 to a total of 105,000.

6. Outstanding First Preference vacancies\* in work identified as part of the defence programme increased from 9,700 at 20th December, 1950, to 25,800 at 1st August. 73,000 other First Preference vacancies mainly concerned with export industries and essential services, were outstanding at the latter date. In the four weeks preceding 1st August, it was only possible to fill 3,100 defence programme vacancies and 15,700 other First Preference vacancies. During the first seven months of 1951, placings in defence vacancies had doubled, but outstanding defence vacancies have nearly trebled. In the same period other First Preference placings increased only slightly, but outstanding vacancies rose by two-fifths.

7. One of the most serious labour shortages affecting the programme, particularly at present, is that of skilled engineering workers. The number of outstanding vacancies in the principal skilled engineering occupations increased from 16,000 to 36,000 in the last twelve months; 13,000 of this increase of 20,000 took place in the last six months. During the same period the comparatively small number of wholly unemployed men in these occupations fell from 4,400 at August 1950 to 3,600 at end-1950 and again to 2,000 at August 1951.

8. Over the next two years or so the number of workers engaged on the defence programme, which has increased by some 200,000 in the last twelve months, will, according to estimates made by the Ministry of Supply, need to be further increased by something between 400,000 and 500,000; of this increase, about 120,000 will be required between mid-1951 and March 1952, and a further 280,000 by March 1953. In addition, an increase of some 75,000 is required in the strength of His Majesty's Forces during the next two years. So far as exports are concerned

- First Preference vacancies are those identified as being connected with work which is of the highest national importance, i.e., certain named industries and services, e.g., agriculture, coalmining, cotton-spinning, iron and steel, electrical generating plant, railway operating service and vacancies on defence or export work. the problem is mainly one of maintaining existing labour forces, but any substantial increase in exports in any industry might change that situation. There are in addition the outstanding demands for basic industries and services such as coal mines and transport. These are smaller in numbers but they are both difficult to fill and as their description indicates of basic importance to the whole defence and export programme. The demand for additional workers may, therefore, be in the region of 500,000; this includes a proportion, which cannot be estimated, of workers who will not be required to move from one factory to another, since their switch to defence production will take place inside the works.

9. On the other side of the balance sheet we have to consider the following possible sources of labour supply—

(a) a reduction in unemployment, (b) any further increase in the total working population, and (c) any diminution of demand in or movement of labour from other industries and services otherwise than as a result of proposals to cut down less essential production.

10. First, the level of unemployment in the two months of July and August was lower than at any time since 1945, and it is unlikely that the level of unemployment at mid-1953 will fall much, if at all, below 150,000 compared with the figure of 186,000 in July 1951.

11. Second, so far as the total working population is concerned, there has been an average increase of 140,000 per year over the past three years. This consists mainly of persons postponing retirement, pensioners returning to work and married women not normally working. It would be unwise to count on a continuing increase in the total working population at the rate of the last two or three years.

12. The third question is the possibility of a diminution of current demand and a movement of labour from less essential industries and services resulting from causes other than specific production cuts. The main cause for these would be the expected but long delayed effects of raw material shortages and of the end-use controls already put into operation. There may also be some increased voluntary movement towards important work on the part of individual workers if the public is given a strong enough lead and sense of urgency. A climate of opinion of this kind would assist the work of my Local Offices in influencing the choice of workers who would, under the proposals contained in Part IV, be required to come to the Exchanges in the course of normal turnover in order to obtain fresh employment though it is unlikely to influence their choice unless the conditions of employment of the work in question also compare reasonably well.

13. An examination of national figures only is misleading because demand and supply vary in intensity in different parts of the country. It is accordingly necessary to examine the incidence of the defence programme as between the different Regions in order to obtain a full appreciation of the nature and magnitude of the labour problems involved.

14. In the first place, unemployment is still spread unevenly over the country. Although the rate for Great Britain is 1·0 per cent., it varies between Regions from 0·3 per cent. in the North Midland Regions to 2·1 and 2·3 per cent. in Scotland and Wales, and there are some districts which still have fair-sized pockets of unemployment, e.g., the Development Areas at Clydeside (2·6 per cent.), South Wales and Monmouthshire (2·6 per cent.), Merseyside (2·4 per cent.) and Tyneside (2·2 per cent.). On the other hand, some places, such as Leicester, Derby, Huddersfield, Gloucester, Birmingham and district, Bradford and Coventry, have unemployment rates of less than ½ per cent.

15. Complete information is not available about the additional labour demands which the defence programme will make in the different Regions. Certain information has, however, been given by the Ministry of Supply concerning the engineering industries which is understood to be complete for the air programme, though not for other sectors. This information is given by Regions in the Appendix, together with the current outstanding vacancies in the engineering industries. It is given solely for the purpose of illustrating the relative distribution of the additional demands between Regions. If complete information were available it might modify some of the details, but it is not considered that the broad picture disclosed in the Appendix would be fundamentally changed. In order to measure the incidence of the additional demands they have been expressed as a percentage of the total number of employees in the engineering industries in each Region, and as a percentage of the total number of employees in other manufacturing industries. It will be seen that the Regions where, on present information, the incidence of the defence programme on the engineering industry will be heaviest are South-Western (18.4 per cent.), North-Western (14.1 per cent.), Southern (11.5 per cent.) and Scotland (10 per cent.). For all other Regions the percentage increase is less than 8 per cent. If we look at the defence demands in relation to the resources of labour employed in other manufacturing industry in the various Regions, it is clear that the same four Regions, together with Midlands, will need a higher proportionate diversion of labour than the others. The South-Western and Southern Regions stand out with 15.7 and 14.1 per cent., Midlands follows with 8.4 per cent., and the others are about 6 per cent.

16. These facts emphasise three important points. First, that the working of the production controls by which the various cuts in less essential industries and services will be put into effect must be flexible so that they can release more labour where it is urgently needed and less in areas where the labour might be frittered away, or indeed unemployed. The second point is that even where this is done to the maximum extent compatible with reasonable administration it will still leave unsolved the labour supply problems of certain areas of particularly heavy demand. Third, even with the measures proposed in the second part of this Paper we must still expect a considerable wastage of those released for defence and export work, a tendency which will be emphasised by the natural practice of employers in releasing first elderly workers and those who are least productive.

17. To summarise, therefore: —

(a) we are faced with an additional demand of between 500,000 and 600,000 workers for defence, His Majesty's Forces and essential industries and services, and this at a time when the general pressure of demand for labour is very high;

(b) we must hope towards the end of the period for some decrease in the numbers unemployed when the re-deployment of labour is complete and we may hope for some increase in the total working population which may range between 200,000-300,000;

(c) there should also be some easement in the competitive demand from less essential manufacture when raw material shortages begin to take effect and if public feeling is aroused, some increase in voluntary movement from less essential employment to defence, export and other essential production.

(d) the incidence of the demand falls unevenly between different parts of the country and thus intensifies the difficulty of ensuring that all the resources of labour available can be concentrated to meet the essential demands;

(e) no mere arithmetical closing of the gap will solve the labour supply problem.

18. I set out below the steps which I have already taken, and propose to take, to encourage labour to enter and remain in defence and export production, to discourage their entering inessential industries and services and to ensure the efficient utilisation by employers of their labour.

III.—Measures already taken

19. During the last months I have discussed on different occasions with the N.J.A.C. the steps which both sides of industry might take to assist in the effective deployment of labour for carrying out the Rearmament Programme. A number of proposals were agreed and have been sent by the Council to its constituent members, and I have written to certain N.J.I.Cs. asking them to give these recommendations careful consideration. Of these the most important are: —

(a) the practicability of some extension of overtime working as a means of increasing production;

(b) the part-time employment and training of women on semi-skilled processes;

(c) the development of schemes of upgrading and training to offset the scarcity of skilled workers. In suitable cases, it was further suggested, that the training which industry could provide itself might be supplemented in Government Training Centres (G.T.C.) on the lines which proved successful in the last war.

20. The response of industry to these recommendations has been encouraging. In many firms satisfactory schemes of upgrading and training have been introduced and, in accordance with an agreement with the engineering industry at national level, local arrangements have been made in Scotland and the Eastern Region for admitting able-bodied workers to classes in Government Training Centres providing training in some of the scarcity skilled occupations. In other Regions negotiations are continuing and I hope that before long some 1,400 engineering training places will have been taken up at G.T.Cs.

21. Suitable arrangements have also been made for dealing with labour redundancies when they arise. Employers have been asked to give Local Offices of the Ministry timely notice of the number and type of workers that they anticipate they will shortly no longer require, and workers who are about to be discharged have been encouraged to register with Local Offices before they actually become unemployed. These arrangements are designed to assist workers to pass from one job to another without an intervening period of unemployment.

22. As work on the Defence Programme builds up to its peak the scarcity of labour of the right type is going to be increasingly felt. To meet this problem the steps so far taken, including schemes for upgrading and training, are by themselves inadequate. More drastic measures are now required.

IV.—Future arrangements

23. I feel sure that the only effective way of making available the workers required, not only for the Defence Programme but also for export and essential civilian production, is the cutting down of less essential civilian production. Further, whatever production controls it may be decided to use for this purpose will, as stated above, have to be applied on a differential basis to ensure that labour is released in areas where it is wanted and to prevent workers from being discharged where suitable alternative employment is not available. On the assumption that such production controls will be introduced, there are ways in which my Department can assist.

24. Labour Supply Inspection.—I am proposing to revive, on a limited scale, a system of labour supply inspection on the lines of what was done during the war. The duties of these technical inspectors will be to visit selected firms and obtain information about the ways in which they are using their labour and, if vacancies for particular kinds of workers have been notified to Local Officers, to ascertain how far these additional workers are really needed and the extent to which the requirements could be met by the firm from its own resources. They will examine whether skilled labour is being extravagantly used or engaged on unimportant work and whether under-employment exists. Employers might then be invited to consider the recommendations made by the Inspectors and to take appropriate action to carry them out.

25. A system of Labour Supply Inspection will not, however, of itself, ensure that employers do discharge the workers they do not require. If an employer is unco-operative, it will be necessary to bring pressure to bear upon him and I have no doubt that the most effective instrument for this purpose would be to cut down his supplies. If it were known that production controls would be used, if necessary, our hands would be greatly strengthened.

26. Regulation of Engagement Order.—During and after the war various Restriction and Control of Engagement Orders made it illegal for an employer and a worker to enter upon an engagement for employment except with the permission of the Ministry of Labour. An employer, therefore, could only obtain his workers and workers could only obtain employment through an Employment Exchange. While penalties were imposed for non-compliance, the main sanction behind the Order was the use of the power of direction.

27. The only certain and fully effective method of ensuring that the labour released by cuts in production or otherwise goes where it is wanted would be by a similar Control of Engagement Order coupled with the power of direction of individuals. In present circumstances, however, the use of powers of direction is out of the question, but Regulation of Engagement Order without power of direction, and operated on the following lines, would go some distance towards solving the problem.

28. The Order would place an obligation upon an employer not to obtain his workers otherwise than through an Employment Exchange. In practice this would compel workers to obtain their jobs through an Exchange because otherwise an employer could not legally engage them. The only penalty would be that imposed on the employer. Power would be taken in the Order to exclude certain parts of the country, so that, if experience showed that the Order was not necessary in some areas, these areas could be excluded from its operation. Agriculture and coal-mining would be excluded, as would registered dock workers, merchant seamen and fishermen.

29. The main object of the Order would be to make all workers seeking employment come to the Employment Exchanges. This would enable the Exchanges to inform workers of the important vacancies and try to persuade them to take them. The Exchanges would thus be able to go a long way in preventing employers who are making an extravagant use of their labour from taking on additional workers and in ensuring that workers do not drift away into unimportant employment. The Order would also reduce substantially the amount of poaching of workers by employers that is at present going on. Experience during the war showed that an Order of this kind was the only effective method of achieving this.

30. I would make it clear from the start that there is no intention of compelling workers to accept employment which they were unwilling to take. When workers came to Exchanges to seek employment, they would be told plainly what were the most important jobs suitable for them and urged in the national interest to agree to be submitted to one or other of them. If he could not be persuaded to take one of the jobs offered to him in defence or export production, he would then be permitted to take the employment for which he asked (except in the case where we felt a firm was fully manned).

31. This method of administering the Order would enable Employment Exchanges to perform their proper functions and would encourage workers to think of an Exchange as a place where they would be told and given good advice about suitable opportunities for employment while still remaining free to choose their jobs.

32. I would therefore ask my colleagues to approve the opening of negotiations forthwith with the T.U.C. and the British Employers Confederation with a view to the introduction of a Regulation of Engagement Order on the lines set out in the preceding paragraphs.

Ministry of Labour and National Service, S.W. 1, 5th October, 1951

A. R.

### APPENDIX

**Table showing by Regions the Estimated Increases required by March 1954, in Employment in the Engineering Industries (S.I.C. Orders VI, VII, VIII and IX) expressed as Percentages of the Total Number of Employees at May 1950,**† in—

(a) the Engineering Industries, and

(b) all other Manufacturing Industries.

| Region | Outstanding vacancies at 4th July, 1951 | Additional labour requirements by March 1954\* | Total additional requirements (2) plus (3) | (4) expressed as percentage of employees in engineering industries at May 1950 | (5) expressed as percentage of employees in all other manufacturing industries at May 1950 | |-------------------------|----------------------------------------|---------------------------------------------|------------------------------------------|--------------------------------------------------------------------------------|----------------------------------------------------------------------------------| | South-Western | 5,528 | 22,695 | 28,223 | 18.4 (1) | 15.7 (1) | | North-Western | 14,472 | 50,456 | 64,928 | 14.1 (2) | 6.4 (4) | | Southern | 5,264 | 12,267 | 17,531 | 11.4 (3) | 14.1 (2) | | Scotland | 6,425 | 24,014 | 30,439 | 10.0 (4) | 6.2 (5) | | Eastern | 5,714 | 6,688 | 12,402 | 7.6 (5) | 6.0 (6) | | London and South-Eastern | 28,319 | 28,872 | 57,191 | 7.3 (6) | 5.7 (7) | | Midlands | 17,486 | 21,214 | 38,700 | 6.0 (7) | 8.4 (3) | | Wales | 1,795 | 2,773 | 4,568 | 5.3 (8) | 2.4 (9) | | North Midlands | 7,380 | 2,670 | 10,050 | 5.0 (9) | 2.4 (10) | | East and West Ridings | 7,891 | 4,347 | 12,238 | 4.3 (10) | 2.1 (11) | | Northern | 3,868 | 2,628 | 6,496 | 3.4 (11) | 2.8 (8) | | Great Britain | 104,142 | 178,624 | 282,766 | 8.2 | 5.8 |

- Figures taken from Ministry of Supply's memorandum (C.P.C. (51) 50) (excluding R.O.Fs. engaged on filling and the manufacture of explosives and a firm manufacturing respirators). It is understood that the additional labour requirements of sub-contractors and minor firms relate to the air programme only, and these figures have been divided between Regions in the same ratio as the additional numbers required by direct contractors for the manufacture of aircraft and components.

† The latest date for which a regional analysis is available. It is not considered that later figures would have any appreciable effect on the percentages shown in columns (5) and (6).

**Notes on the Interpretation of the figures**

In assessing the significance of the percentages in columns (5) and (6), some regard must be paid to the likely degree of error in the statistical information used in the calculation. The additional labour requirements given by the Ministry of Supply in C.P.C. (51) 50 are not comprehensive and do not include the additional labour required for Admiralty orders (which is not, however, expected by the Admiralty to amount to a significant total—C.P.C. (51) 54). The percentages in columns (5) and (6) may be affected by the fact that the Ministry of Supply's figures cover different proportions of the different programmes, e.g., the aircraft programme is fully covered, but only 60 per cent. of the munitions supplies programme and 50 per cent. of the radio programme are covered. This may introduce some bias into the figures since the different programmes affect the Regions in different degrees, but it may not be appreciable. A further bias may have been introduced by spreading the 70,000 additional workers required by sub-contractors and minor firms for the air programme (about 36 per cent. of additional defence requirements) in the same ratio as the regional distribution of the labour requirements of direct contractors for the manufacture of aircraft and components. It is understood that the figure of 70,000 includes an unknown number of workers who will be transferred to defence work within establishments as well as additional workers who will have to be recruited from outside. There is also probably some overlap between the figures in columns (2) and (3), which is not possible to eliminate and which is not likely to affect the Regional distribution. CABINET

TREATY OF ALLIANCE WITH LIBYA

MEMORANDUM BY THE SECRETARY OF STATE FOR FOREIGN AFFAIRS

I should like my colleagues to be aware of the most recent developments regarding the negotiation of a Treaty with Libya. It will be recalled that on 1st August the Cabinet approved the text of a 25-year Treaty of Alliance with Libya which was to be negotiated in the near future and signed when Libya became independent (C.M. (51) 57th Conclusions, Minute 6). Financial and military agreements, to run concurrently with the Treaty, were to be settled between Departments and possibly negotiated in the near future but were not to be signed until the United Nations General Assembly had completed their coming debate on Libya. Meanwhile in Libya the United Nations Commissioner's Co-ordinating Committee, comprising British, French and Libyan members, were considering the manner in which power should be transferred progressively to the Provisional Libyan Government in accordance with the United Nations Resolution of 1950.

2. The first new development was the Co-ordinating Committee's conclusion that, in order to comply with the Resolution, the United Kingdom and France would have to transfer financial responsibility to the Libyans before the declaration of independence: in fact, there should be three transfers, first of comparatively unimportant functions involving no financial expenditures; secondly, of a large group of Powers involving financial responsibility; and thirdly, of defence and foreign affairs on the declaration of independence. The consequence of this decision was that His Majesty's Government would have to conclude an interim Financial Agreement with the Provisional Libyan Government before transferring the second group of powers, i.e., in the immediate future; and a tentative draft agreement was therefore prepared by the Foreign Office and the Treasury. It is proposed to inform Parliament after signature of this Interim Agreement.

3. The second new development was the preoccupation of the Secretary of State for War concerning our security of tenure of military facilities in Libya during the interval which was bound to occur between the signature of a Treaty of Alliance, on Libyan independence, and the ratification of such a Treaty by a Libyan Parliament. In order to cover this interval it was considered desirable to prepare an Interim Military Agreement which could be negotiated at the same time as the Interim Financial Agreement and (while containing nothing likely to excite violent criticism in the United Nations Assembly) would guarantee the status quo until the conclusion of a new arrangement (i.e., a long-term Military Agreement next year.

4. This was the state of affairs when the Libyan Prime Minister, Mahmud Bey Muntasser, visited London on 10th September, and it was agreed that his unofficial comments should be sought on all five documents, viz.:—

(i) Treaty of Alliance. (ii) Interim Financial Agreement. (iii) Interim Military Agreement. (iv) Long-term Financial Agreement (very similar to the Interim Agreement). (v) Long-term Military Agreement (a highly complex document of which a tentative draft had been prepared by the interested Departments).

Mahmud Bey's suggestions have been extremely useful as a means of shortening and facilitating future negotiation and many have already been incorporated, with the agreement of the Treasury, into the latest draft of the Interim Financial Agreement, which is attached to this Memorandum as Annex I. This document was sent to the British Resident at Tripoli on 22nd September with instructions to negotiate it formally with the Provisional Libyan Government.

5. On the other document which it was proposed to negotiate immediately, the Interim Military Agreement, the Libyan Prime Minister made comments which have not proved entirely acceptable to the Service Departments and a re-draft (Annex II to this Memorandum) was sent to the British Resident in Tripoli, also on 22nd September. Unfortunately our intention to conclude this agreement simultaneously with arrangements for the transfer of intermediate powers to the Libyans has come under heavy criticism from the United Nations Commissioner and it now appears that it would be dangerous to insist on concluding an interim military agreement with the present semi-autonomous Government. The wiser course seems to be to negotiate and initial the agreement with the present Government now, but to defer signature until the day of independence, when the present Cabinet will, we anticipate, be appointed the "duly constituted Government of Libya" by the King of Libya. After current discussion of this question with the Service Departments and the Treasury it is proposed to send telegraphic instructions to the British Resident concerning negotiation of the Interim Military Agreement.

6. The Treaty of Alliance and the Long-term Financial and Military Agreements, on all of which the Libyan Prime Minister had comments to offer, must now be reconsidered by Departments and a meeting of the Former Italian Colonies Committee will shortly be called for this purpose.

7. Meanwhile arrangements are being made for the Commonwealth Governments to be suitably informed of the position. The United States and French Governments, being immediately concerned, have already been informed.

H. M.

Foreign Office, S.W. 1, 3rd October, 1951. ANNEX I

AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND AND THE PROVISIONAL GOVERNMENT OF LIBYA REGARDING FINANCIAL ASSISTANCE TO LIBYA TO BE PROVIDED BY THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND

ARTICLE 1

Interpretation

(1) In this Agreement—

"the British Government" means the Government of the United Kingdom of Great Britain and Northern Ireland;

"the Provisional Government" means the Provisional Government of Libya;

"the Libyan Government" means the Federal Government of Libya which is to succeed the Provisional Government;

"the Provincial Administrations" means the local Governments or Administrations of Cyrenaica, Tripolitania and the Fezzan;

"the Currency Commission" means the Currency Commission the constitution, powers and duties which are provided for in the Currency Law enacted by the Provisional Government of Libya on the day of , 1951;

"the initial issue of Libyan currency" means all Libyan currency notes and coins issued by the Currency Commission against Military Administration lire notes, Egyptian currency notes and Algerian franc notes which are tendered in Libya within such period or periods from the date on which the Libyan pound becomes the standard of currency in Libya as the Currency Commission may in its discretion determine.

(2) As from the date on which the Libyan Government succeeds the Provisional Government, this Agreement shall have effect as though references to the Provisional Government were references to the Libyan Government.

ARTICLE 2

Coming into force and duration of Agreement

This Agreement shall come into force upon signature and shall continue in force until 31st March, 1953, unless previously replaced by an Agreement between the British and Libyan Governments.

ARTICLE 3

Purpose of Agreement

This Agreement is made to ensure that Libya shall enjoy conditions of financial stability and orderly economic development.

ARTICLE 4

Obligations of the British Government

In order to carry out the purpose set out in Article 3 of this Agreement, the British Government will, provided Libyan financial affairs are being conducted in a manner appropriate for the achievement of that purpose and provided that the British Government is informed fully of Libya's needs, give financial assistance to Libya as follows:—

(a) The British Government will contribute during the financial year beginning on 1st April, 1952, to the Development and Stabilisation Agency which is to be established under Libyan Law, and may contribute during the financial year beginning on 1st April, 1952, to the Finance Agency which is to be so established, sums not exceeding £500,000 sterling in the aggregate for the purposes for which those Agencies are to be established. (b) The British Government will provide one hundred per centum sterling backing for the initial issue of Libyan currency in accordance with arrangements acceptable to the British and Provisional Governments.

(c) Until 31st March, 1952, the British Government will continue to give financial assistance to the Governments or Administrations of Cyrenaica and Tripolitania, it being the intention that the Provincial Administrations will, out of their general revenues, finance the Provisional Government in order to enable the Provisional Government to exercise the powers progressively transferred to it.

(d) As regards the financial year beginning on 1st April, 1952, if, without prejudice to the undoubted right of Libya to determine its own Budgets, there is agreement between the British and Provisional Governments that the Budgets of the Provisional Government and the Provincial Administrations for that year have been framed prudently, economically and with regard to the purpose set out in Article 3 of this Agreement, the British Government will make a contribution to the Provisional Government of a sum equal to any deficiency in the combined Budgets. In the event that agreement is not reached, the British Government will nevertheless make a contribution to the Provisional Government of any sum essential to support the Libyan economy.

ARTICLE 5

Obligations of the Provisional Government

In order further to carry out the purpose set out in Article 3 of this Agreement, the Provisional Government agrees that there shall be a Chief Financial and Economic Officer and an Auditor General, who shall be officers of the Provisional Government and subject to the Civil Service Laws of Libya. All matters relating to their appointments shall be the subject of consultation between the British and Provisional Governments.

ARTICLE 6

Duties of the Chief Financial and Economic Officer and Auditor-General

(a) The Chief Financial and Economic Officer shall have access to the Prime Minister and the Minister of Finance of the Provisional Government. He shall be the principal financial and economic officer of that Government.

(b) The Auditor-General shall be the principal auditor of the Provisional Government.

(Secret)

DRAFT LETTER FROM THE BRITISH RESIDENT, TRIPOLITANIA, TO THE PRIME MINISTER OF THE PROVISIONAL LIBYAN GOVERNMENT

To be handed to the latter when the Financial Agreement is signed

Your Excellency,

I have the honour to transmit to Your Excellency a Minute of the negotiations which preceded the Financial Agreement, signed to-day between our two Governments, and to enquire whether you agree that the Minute correctly records the proceedings.

I avail myself, &c.

(Secret)

DRAFT REPLY FROM THE PRIME MINISTER OF THE PROVISIONAL LIBYAN GOVERNMENT

Your Excellency,

I have the honour to acknowledge the receipt of your letter of to-day, which reads as follows:—

(set out the letter and enclosed Minute)

I confirm that the Minute correctly records the proceedings.

I avail myself, &c. NEGOTIATIONS BETWEEN THE BRITISH GOVERNMENT AND THE PROVISIONAL GOVERNMENT OF LIBYA REGARDING THE FINANCIAL AGREEMENT OF 1951

In the course of discussions the British Delegation drew attention to the opening words of Article 4 of the Agreement which require that Libyan financial affairs shall be conducted in a manner appropriate for the achievement of the purpose set out in Article 3 of the Agreement and that the British Government shall be fully informed of Libya's needs and explained the reason for this provision. The Delegation said that the forms of financial assistance which the British Government proposed to give to Libya, while agreed by the two Governments to be those most likely to bring the greatest benefit to Libya, made it essential that the financial arrangements in Libya should be such as to ensure the effectiveness of the assistance. The Delegation regarded it as implicit in the opening words of Article 4 that the British Government should be satisfied regarding these arrangements and felt that it would be of assistance to Libya if they indicated the arrangements which, in the view of the British Government, were necessary for this purpose. The Delegation said these arrangements were that Libya should ensure that—

The Development and Stabilisation Agency and the Finance Agency

(a) no variation of the constitution, powers and duties of the Development and Stabilisation Agency and the Finance Agency is made without prior consultation with the British Government;

Currency

(b) the Libyan currency is always maintained with one hundred per cent. backing in foreign currencies, of which at least seventy-five per cent. shall be sterling;

Currency Commission

(c) no variation of the constitution, powers and duties of the Currency Commission is made without prior consultation with the British Government;

(d) the holders of the offices of Chief Financial and Economic Officer and Auditor General are persons acceptable both to the British Government and to the Provisional Government;

(e) all questions for the decision of the Provisional Government which have financial or economic implications and all draft laws and subsidiary legislation of the Provisional Government which have financial or economic implications are considered by the Chief Financial and Economic Officer and that he is given full opportunity of advising thereon before the decision is made or the legislation is enacted;

(f) the Chief Financial and Economic Officer is permitted to make to the Provisional Government recommendations relating to financial and economic matters, including recommendations for the enactment of any law or subsidiary legislation having financial or economic implications;

Auditors of the Provincial Administrations

(g) the Heads of the Audit Departments of the Provincial Administrations are under the direction of the Auditor General of the Provisional Government;

Budgets

(h) the Budgets of the Provisional Government and Provincial Administrations for the financial year commencing on 1st April, 1952, are reviewed by a Budget Committee composed of the Finance Minister of the Provisional Government and the principal financial representatives of the Provincial Administrations which should examine the Budgets in draft in the light of the purpose set out in Article 3 of the Agreement and prepare a consolidated statement of the Budgets and of the Budgets of the Development and Stabilisation Agency and the Finance Agency; (ii) the consolidated statement above referred to is made available to the British Government before 31st October, 1951. There should be consultation between the British and Provisional Governments, as required, including consultation, prior to the determination of the amount to be contributed by the British Government under paragraph (d) of Article 4 of the Agreement, regarding the incurring of any major expenditure or obligations in connection with projects not provided for in the previous Budgets;

Languages

(i) all accounts and documents relevant to the implementation of the Agreement shall be in English and Arabic, each version being equally authoritative;

Sterling Area

(j) Libya becomes a member of the Sterling Area in accordance with the terms of letters to be exchanged between representatives of the British and Provisional Governments, drafts of which have been initialled by the principal British and Libyan delegates in the course of the negotiations.

2. As regards the Development and Stabilisation Agency and the Finance Agency, the British Delegation explained that the constitution, powers and duties of the Agencies had been carefully considered at the meeting of Experts on Libyan Financial, Economic and Development Problems and had been accepted by the Provisional Government. The Delegation said that the British Government felt that it could not be satisfied that Libya was conducting its financial affairs in an appropriate manner unless the constitutions, powers and duties of the Agencies were retained substantially as the Provisional Government had approved them.

3. As regards the question of Libyan currency, the British Delegation said that, for reasons which had been explained fully at the meeting of Experts on Libyan Financial, Economic and Development Problems, the Currency Commission system was the only currency system appropriate for ensuring that Libya would enjoy conditions of financial stability and orderly economic development, since in no other way could a stable currency be provided so simply, inexpensively and quickly. The Delegation said that the Currency Commission system postulated that Libya should be a member of the Sterling Area. The Delegation added that, in these circumstances, the British Government felt that it could not be satisfied that Libya was conducting its financial affairs in an appropriate manner if she did not comply with paragraph (b) above, retain the Currency Law substantially on the lines along which the Provisional Government had approved it and remain a member of the Sterling Area.

4. The British Delegation also referred to the concluding sentence of Article 4 (d) of the Agreement and explained that, in the event that the Libyan Budgets were not agreed, the British Government would still wish to make a contribution of any sum essential to support the Libyan economy but would be compelled itself to assess that sum.

5. The principal delegate of the Libyan Provisional Government stated that the Provisional Government proposed the enactment of laws which would include provisions for ensuring that:

(a) Consolidated Fund-Credits.—All income (including the proceeds of taxes, duties and other imposts and all grants or loans received) of the Provisional Government and of the Provincial Administrations is paid into the Consolidated Fund concerned;

(b) Consolidated Fund-Debits.—Only expenditure sanctioned by legislation is paid out of the Consolidated Fund concerned;

(c) Consolidated Fund-Withdrawals.—No sum is withdrawn from the said Consolidated Fund except under the authority of a warrant countersigned by the Auditor General in the case of the Provisional Government or the Head of the Audit Department in the case of the Provincial Administrations, every warrant to be so countersigned if the officer concerned is satisfied that it has been issued and is in accordance with constitutional requirements and the provisions of paragraph (b) above, but not otherwise; (d) Audit.—The accounts of all Departments of the Provisional Government and of the Provincial Administrations are audited by the Auditor General in the case of the Provisional Government and the Head of the Audit Department in the case of the Provincial Administrations and are rendered as required by those officers; and that those officers and their deputies at all times have access to all books, records, returns and other documents relevant to such accounts and report to the Government or Administration concerned on the exercise of their functions. The British Delegation took note of the statement that the Provisional Government proposed the enactment of such laws, which they regarded as essential to the orderly conduct of Libyan financial affairs.

(Secret)

DRAFT LETTER FROM THE BRITISH RESIDENT, TRIPOLITANIA TO THE PRIME MINISTER OF THE PROVISIONAL LIBYAN GOVERNMENT

I have the honour to refer to the request that Libya should become a member of the Sterling Area, which was made by the Minister of Finance in the Provisional Libyan Government at the Fourth Session of the Meeting of Experts on Libyan Financial, Economic and Development Problems, and have pleasure in informing Your Excellency that arrangements are being made so that Libya will become a member of the Sterling Area with effect from 1951, the date on which the control of Libya's finances is handed over to the Provisional Libyan Government. These arrangements will hold good when the Libyan Government takes over from the Provisional Libyan Government.

2. So long as Libya remains a member of the Sterling Area, she will be able to trade automatically in sterling throughout the Sterling Area. She will also be able to trade freely with other countries and to draw automatically upon the Central Reserves of the Sterling Area to meet such commitments as she may have in currencies other than sterling, including commitments in United States and Canadian dollars. The extent to which Libya can make drawings in United States and Canadian dollars will not be limited to her net earnings of these currencies.

3. For her part, Libya will, so long as she remains a member of the Sterling Area, be expected, in common with all other Sterling Area members,—

(a) to maintain an exchange control system on normal Sterling Area lines; (b) to pay into the Central Reserves of the Sterling Area all United States and Canadian dollars that she may earn beyond necessary working balances of banks; (c) to confine her drawings of currencies, other than sterling, to what she considers to be reasonable to meet her requirements and, whenever stringency exists in United States and Canadian dollars, to limit her drawings in these currencies to what is required in order to meet her essential needs.

4. I avail myself, &c.

(Secret)

DRAFT REPLY FROM THE LIBYAN PRIME MINISTER

I have the honour to acknowledge the receipt of Your Excellency's letter of to-day, in which you informed me as follows:—

ANNEX II

NOTE FROM THE LIBYAN PRIME MINISTER TO THE BRITISH RESIDENT, TRIPOLI

(Draft of 22nd September)

Your Excellency,

In view of the delay which must necessarily occur before it will be possible to conclude the Treaty of Friendship and Alliance into which our two Governments earnestly wish to enter, and in view of my Government's desire that interim provision should be made for our mutual defence, I have the honour to propose that the facilities which your Government at present in fact enjoy for stationing British armed forces in Libya, including privileges and immunities in that connection, shall continue pending agreement between our two Governments on any new or different arrangements.

The facilities in question shall include an option on the sites which the Cyrenaican Government have been asked by the British Government to make available, and the right if the option is exercised, to use the sites in question for military purposes.

It is understood that the British Government will carry into effect its plan for accommodating British forces outside the cities, except in a limited number of cases where the nature of the duties of the British armed forces renders this course impracticable. The British Government will use its best endeavours to complete the execution of the plan as quickly as the physical difficulties can be overcome.

If the British Government accept this proposal, it is suggested that this note and Your Excellency's reply to it in that sense should be regarded as constituting an Agreement between our two Governments.

(Draft)

REPLY FROM THE BRITISH RESIDENT, TRIPOLI, TO THE LIBYAN PRIME MINISTER

I have the honour to acknowledge Your Excellency's letter of the day 1951, as follows:

(Quote text of letter)

I am to inform Your Excellency that His Majesty's Government welcome the proposal contained in Your Excellency's letter and agree that this exchange of letters between us shall be regarded as constituting an Agreement between our two Governments. CONTINUANCE OF THE FESTIVAL PLEASURE GARDENS

MEMORANDUM BY THE LORD PRIVY SEAL

The Festival Pleasure Gardens first came to the notice of the Government late in 1948 as a project in which the London County Council were keenly interested for providing a permanent recreation and amusement centre in London on the general lines of the Tivoli in Copenhagen. During the detailed examination of the scheme the L.C.C. elections in the spring of 1949 resulted in a political deadlock in London government. The attitude of the London County Council became much more reserved, and although a five-year run was recommended in order to try out the project and to spread over a reasonable period the capital expenditure involved, the London local authorities were not prepared to commit themselves to anything beyond a scheme for the period of the Festival. This uncomfortable compromise was adopted. My colleagues will be familiar with the troubles which then ensued—further delays and increased costs resulting from the devaluation of sterling, the failure to obtain a satisfactory management for the one-year scheme, the labour disputes, the unfortunate choice of the main contractor, the appalling weather and the completion of the work more than a month late at a greatly enhanced cost.

2. Although the summer of 1951 has not been particularly fine the experience since opening the Gardens has by contrast been most encouraging and has given solid confirmation that a great popular demand exists for such facilities in London, and that the promoters of the Gardens have been singularly skilful in gauging and in catering for this demand from a broad cross-section of the public.

3. Attendances up to 27th September have been 7,167,200 and they promise to exceed not only the original estimate of 6 million over the longer season, but the recently revised total of 7½ million. On the basis of actual operation and of a detailed financial review by the Chairman, Sir Charles King, it has been estimated that the total gross income for the whole season will be £1,153,000, and the total expenses, after allowing for contingencies, will be about £500,000, giving a gross operating profit of £653,000 to set against the net capital expenditure of £1,853,000 assuming satisfaction in full of all disputed claims, and of liabilities for winding up and reinstatement, which allows for salvage amounting to £89,000.

4. The reconstituted Board have also, at my request, furnished me with estimates of expenditure and revenue on the assumption that they were invited and empowered to continue operation of the Gardens for a further period, which has been taken for the purpose of their calculation as two years. These would, without very substantial alteration, apply to, say, five years, which would be a more reasonable period to take, with the qualification that more capital works would be needed, but amortisation would be spread over a longer period. The Board estimate that maintenance and operating costs in future years would be about £400,000 per annum, assuming opening hours from 10.30 a.m. to 11.30 p.m., or about £365,000 per annum with reduced hours from, say, 2.30 p.m. to 10.30 p.m. to cut out double shifts. "Capital" expenditure totalling £150,000 would be needed over the second and third years, but a large part of this (at least one-third) would in terms of works consist of maintenance and something under 10 per cent. of sanitation. Very little of it would be new construction or extensions of buildings. There are obvious difficulties in estimating the post-Festival revenue, but the Board consider that one-half of this year's revenue, say, £580,000, would be a "safe" figure, that two-thirds, or £775,000, would be an "optimistic" figure, and that a repetition of this year's revenue would be "most optimistic." They therefore conclude that on a conservative estimate an extension for two years would not lose money and may result in an operational profit (£212,000), while on the higher figures it is by no means impossible to achieve a surplus of over £600,000, by obtaining a revenue of £1,550,000 against an expenditure of £880,000–£950,000.

5. My own view is that, given average weather and continued energetic management, the Gardens have great revenue-earning possibilities even after the Festival, and ought, if continued for five years, to be able to repay a substantial part at any rate of the loan indebtedness of some £1,172,000 which seems likely to be outstanding at the end of this season. This assumes the Company repays £250,000 (see paragraph 11) and that £200,000 working capital is left with the Company for continued operations after this season's liabilities have been met. This working capital will be produced by retention of existing revenue and hence deferment of repayment of loans. (The total amount actually lent to the Company at present is £1,432,000. Actual expenditure on capital and current account combined at the end of the first season looks like working out at about £2,353,000, i.e., £1,853,000 plus £500,000. The loss—i.e., the net deficit—at the end of the first season will be about £1,200,000.)

6. This and the following paragraphs deal with other general considerations which arise.

Public Demand

I am convinced that public opinion generally supports the continuation of the Pleasure Gardens for a further period of years, and that if they were terminated a strong demand for some new permanent facilities of this kind would immediately arise. The London County Council appear to share this view and they have by a majority passed a resolution on 31st July definitely committing themselves that if as a result of detailed examination "a continuation should be decided upon the Council would not raise objection to enabling legislation to permit an extension of not more than five years, but . . . that there should be an experimental period of two years after the conclusion of the Festival before any decision is taken for or against a permanent continuance and that the consent of the Council should be required to any extension beyond two years."

Tourist Aspects

7. The tourist attractions of the Gardens are particularly important in view of the worsening of the balance of payments and the success achieved this season in breaking all previous records (tourist traffic for the first eight months of 1951 is estimated at 315,000 or 14 per cent. higher than for the same period last year, and August tourist traffic was 21 per cent. above last year and 68 per cent. more than the pre-war average). According to recent checks over three complete days 70–80 per cent. of the Festival Gardens visitors have proved to be Londoners; 18–25 per cent. provincials and 1½–5 per cent. overseas visitors, the lower figure for overseas visitors being after the middle of September when the tourist season was ending. A very rough comparison with tourist figures indicates that the Gardens have been attracting the equivalent of one visit from something like one-third of the tourists arriving in this country, despite the strong competition of the South Bank, which is now ended. There seems little doubt that continuance of the Gardens would be a substantial competitive factor in attracting tourists, and the British Travel and Holidays Association have gone on record to this effect.

Economic Aspects

8. On grounds of saving man-power, as well as costs of operation, there may be something to be said for limiting opening hours of the Gardens in the next two or three years so that not more than one shift of staff is required for them, as proposed in paragraph 4. It is impossible to estimate how far public spending at the Gardens hits other enterprises, but there is no reason to believe that the net effect is harmful. Some of it is no doubt at the expense of various forms of racing and gambling; while some of it probably diverts money from cinemas in which there is a considerable dollar spending element, and some of it encourages Londoners to amuse themselves in London instead of travelling to resorts, where they would create consequential demands for vehicles, oil and road maintenance. Continuance of the Gardens would itself require appreciable man-power and materials, but on balance it seems reasonable to assume that even in present economic conditions large attendances at the Festival Gardens are an advantage rather than a burden on the national economy.

Competition with other Enterprises

9. Nevertheless, there is no doubt that amusement and other industries will tend to blame any worsening of their position on the Festival Gardens and will eye narrowly any competitive privileges. It seems fair that if the Gardens are decided by Parliament and the London County Council to represent the best way of using this part of Battersea Park for the amenity and recreation of the public no rent should be payable. The Gardens enjoy no privileges as regards entertainment tax. The Central Land Board see no objection to continuing the present exemption from payment of development charge during such period as the Gardens remain open, on the basis of legislation expiring within five years. There can be no question that the Company should pay profits tax and income tax if it should eventually make a profit, but the question of the basis to be taken for depreciation and the point at which profit earning should be regarded as beginning requires considerable discussion with the Inland Revenue. Finally, I understand that the Board assume that in future years they will be liable to pay rates and have made provision accordingly.

Relation to Investment Programme

10. Another source of possible embarrassment is the question of the application to the Pleasure Gardens of the Chancellor of the Exchequer's ban on investment expenditure for entertainment purposes in excess of £5,000. The Board's present estimate for "capital" expenditure in the next two years totals £150,000, but a good deal of this relates to gardening operations, dismantling, storing, re-erection and replacement of tentage, expenditure on vehicles, dismantling structures no longer required, fencing, clothing and expenditure on catering establishments, which do not come under the ban. It also remains to be established whether, according to existing practice, the Gardens rank for investment expenditure purposes as one enterprise, or as a series of different restaurants, theatres, amusement rides, &c., sharing a single large site like the factories on a Government trading estate. These matters are being examined in detail, but it is clear that in the event of a decision to continue the Gardens Parliament must be told exactly what the position is, and that the passage of legislation must be accepted as specifically empowering the giving of permission for the minimum work necessary for the Gardens to open in 1952 and 1953, even if some dispensation from the ban is involved. As the Economic Secretary to the Treasury told the House on 17th July: (Hansard, Cols. 1059-60)

"... the ban applies to Government-sponsored projects as well as to others. ... If it is thought advisable that the Festival Gardens should continue that matter would, of course, come before the House as legislation would be involved, and it would be for the House to decide."

Finance

11. As I have already stated in the House on 24th July (Hansard, Col. 1871) "Assurances that no fresh capital will be needed and that there will be substantial repayments in reduction of the Exchequer loans already made are essential conditions for Government agreement," and I am satisfied that these conditions can be met. I understand that I shall shortly be receiving from the Company a formal offer to repay £250,000 from this year's working, and this will leave them with sufficient working capital to carry on and to get the Gardens into shape for next season, provided that they are able to settle the contractor's claims in accordance with their estimates. (If the estimated final payment to the contractor should be exceeded a corresponding amount of the £250,000 would have to be deducted or refunded to them.) Assuming the full £250,000 is repaid on this season's working, the position agreed between the Government and the L.C.C. about future repayments, as and when they become possible, is:

(i) the Exchequer will get a further £20,000, i.e., the balance of the first £270,000 repayment; (ii) of the next £500,000 the Exchequer will get £300,000 and the L.C.C. £200,000; (iii) the Exchequer will get the next £662,000.

The L.C.C. have, however, received a guarantee that their total ultimate loss shall not exceed £40,000; their Resolution of 31st July mentioned above, reiterated the importance they attach to this guarantee, and there would seem to be no possibility whatever of persuading them to abandon it. This means that if the total repayments by the end of 1953 had not reached £670,000 and it was decided at that stage not to continue the Gardens, the Exchequer would have to refund to the L.C.C. a sufficient amount to bring the total repayment to them up to £160,000 (the £200,000 originally lent by them less the £40,000 they are prepared to lose). If, for example, £250,000 were repaid on this year’s working, and a further £250,000 by the end of 1953, the L.C.C. would receive only £100,000 from the Company and would have to get £60,000 from the Exchequer, which would mean that the net total return to the Exchequer would be £340,000 on the three years.

12. I propose, and I understand that the L.C.C. would agree, that the existing Festival Gardens Company should continue to operate the Gardens, and that in giving effect to any changes of personnel the Government should retain a majority on the Board of Directors as long as there is a large liability for loan repayment to the Treasury. It is of the utmost importance that the Gardens should continue under a similar type of management to the present one.

Observance of Standards

13. The general standards embodied in the Festival Pleasure Gardens at present are in general (subject to the usual chronic inadequacies of the catering industry) reasonably satisfactory and acceptable to all shades of opinion. Vigilance will be necessary to ensure, if the Gardens are to continue, that there is no let-down of standards of any sort, and I would propose, with the support of the London County Council, that a strong directive should be given to this effect.

Legislation

14. Existing legislation authorising the Festival Gardens is contained in the Festival of Britain (Supplementary Provisions) Act, 1949, and the Festival of Britain (Sunday Opening) Act, 1951. Continuance will require amendment of the 1949 Act to suspend section 3 dealing with dismantling and reinstatement for five years (or for two years if the Government and the L.C.C. so decide); to repeal sections 8 and 9 dealing with grants for landing stages, and possibly section 4 dealing with action for nuisance; to perpetuate the Festival of Britain (Sunday Opening) Act, 1951, in so far as it applies to the Festival Pleasure Gardens, and to include certain guarantees, e.g., of free public access to appropriate sections such as the riverside walks for periods when the Gardens are not in operation and when maintenance work permits. Parliament has already had something close to a Second Reading debate on the subject (Hansard, Cols. 1014-1088—25th June, 1951).

15. The L.C.C. in their resolution of 31st July, 1951, also stipulated that in the course of detailed examination the possibilities should be explored of—

(1) provision in the royal parks of games facilities which could otherwise be provided in the Pleasure Gardens area; (2) reduction in the price of admission in future years; and (3) remission of admission charge for old age pensioners.

I am taking these points up with Festival Gardens Limited, and in the case of (1) with the Ministry of Works, but I am not optimistic about being able to meet any of them, and I gather that the L.C.C. may not press them very hard.

16. I am quite clear as a result of full examination that—

(a) the public want the Pleasure Gardens to continue; (b) continuance is in the interest of the taxpayer and of the national economy; (c) such practical difficulties as there are can be overcome provided an early decision is reached.

17. I am sorry to trouble my colleagues with the matter at this awkward stage, but I am compelled to do so as the Festival of Britain (Supplementary Provisions) Act, 1949, requires the Minister of Health (now Local Government and Planning) to make an order fixing an "appointed day" six months after the date on which the Gardens were first opened to the public, and binds the Company as soon as may be after the appointed day to proceed with reinstatement of the Park. As the Fun Fair was opened on 11th May and the Gardens as a whole on 28th May there is some doubt whether the appointed day ought to be 11th November or 28th November, but it would be undesirable to delay beyond 12th November, and if the Gardens are to continue a Bill must be ready for introduction immediately the new Parliament meets, and the London County Council and the Company must be given definite guidance about holding the position open until a firm decision can be taken at the beginning of November.

18. In view of the General Election I think my right course at this stage is to confine myself to seeking the authority of the Cabinet to:

(1) inform the L.C.C. and the public that the detailed examination promised has been carried out and has led the Government to the view that continuance is practicable and desirable, and that legislation ought to be introduced accordingly to enable the Festival Pleasure Gardens to be continued for a period of up to five years, subject to cessation at the end of two years if the Government or the L.C.C. so desire;

(2) arrange for Parliamentary Counsel to have Bill ready for introduction at the beginning of the next Parliament if Ministers at the time so decide;

(3) instruct the Board of Festival Gardens Limited and the Festival Office that pending a firm decision when the new Parliament meets they should take such steps as are essential (not involving any expenditure beyond their already available means or forward commitments) to make it possible to reopen the Gardens next year if continuance should be decided upon.

R. R. S.

Office of the Lord Privy Seal, S.W. 1, 3rd October, 1951. Planning) to make an order fixing an "appointed day" six months after the date on which the Gardens were first opened to the public, and binds the Company as soon as may be after the appointed day to proceed with reinstatement of the Park. As the Fun Fair was opened on 11th May and the Gardens as a whole on 28th May there is some doubt whether the appointed day ought to be 11th November or 28th November, but it would be undesirable to delay beyond 12th November, and if the Gardens are to continue a Bill must be ready for introduction immediately the new Parliament meets, and the London County Council and the Company must be given definite guidance about holding the position open until a firm decision can be taken at the beginning of November.

18. In view of the General Election I think my right course at this stage is to confine myself to seeking the authority of the Cabinet to:

(1) inform the L.C.C. and the public that the detailed examination promised has been carried out and has led the Government to the view that continuance is practicable and desirable, and that legislation ought to be introduced accordingly to enable the Festival Pleasure Gardens to be continued for a period of up to five years, subject to cessation at the end of two years if the Government or the L.C.C. so desire;

(2) arrange for Parliamentary Counsel to have Bill ready for introduction at the beginning of the next Parliament if Ministers at the time so decide;

(3) instruct the Board of Festival Gardens Limited and the Festival Office that pending a firm decision when the new Parliament meets they should take such steps as are essential (not involving any expenditure beyond their already available means or forward commitments) to make it possible to reopen the Gardens next year if continuance should be decided upon.

R. R. S.

Office of the Lord Privy Seal, S.W. 1, 3rd October, 1951. CABINET

CLOSER ASSOCIATION IN CENTRAL AFRICA

MEMORANDUM BY THE SECRETARY OF STATE FOR THE COLONIES AND THE SECRETARY OF STATE FOR COMMONWEALTH RELATIONS

We circulate herewith for the information of our colleagues the final communique issued on 21st September by the Conference on the Closer Association of the Central African Territories which we attended at the Victoria Falls with representatives of the three territories. No immediate decisions are required on the conclusions of this conference; but early decisions will be needed after the General Election and we wish to place our views on record. Our main recommendations are that—

(1) as soon as possible after the General Election His Majesty's Government should publicly endorse the conclusions of the Victoria Falls Conference, including the proposal to resume the conference in London about the middle of 1952;

(2) at the same time His Majesty's Government should state publicly that it would favour in principle a scheme of federation between the three territories on the general lines recommended by the London Conference of officials, and considers that such a scheme is in the best interests of the Africans as well as of the other inhabitants of the territories; that it recognises that African opinion in the two northern territories has declared itself as opposed to these proposals; but that, in the light of the assurances agreed upon at the Victoria Falls Conference and of the economic and other advantages of closer association, it trusts that Africans will be prepared to give further and favourable consideration to the proposals; His Majesty's Government should also endorse the statement in paragraph 11 (i) of the Victoria Falls Conference communique that any consideration now or in the future of amalgamation of the three territories is excluded unless the majority of the inhabitants of all three territories desire it, and should make it clear that a similar principle would apply equally to amalgamation of two of the territories or any part thereof;

(3) we should regard the federation of the three Central African territories as an essential measure for preventing non-British influences from the Union of South Africa from encroaching on and eventually engulfing British Central Africa. In our public statement we should endorse the agreed declarations of the Victoria Falls Conference that the British connection and British traditions and principles in the Central African territories should be so strengthened as to ensure that they continue to prevail.

Background of our visit to Central Africa

2. In our memorandum of 3rd May we submitted to our colleagues the report of the London Conference of officials, which recommended that closer association between the three territories ought to be brought about urgently and that this should be done not by amalgamation of the territories but on a federal basis. On 31st May our colleagues approved our proposals that the report should be published and that His Majesty's Government, without being committed to acceptance of the proposals, should commend them in general terms for the careful consideration of all the peoples concerned as embodying a constructive approach. The report was duly published and a statement to this effect made on 13th June when our intention to visit the Central African territories during the summer recess was also announced. Since then public discussion of the proposals has been proceeding in the three territories.

Our visit to Central Africa

3. We duly visited Central Africa during August and September. The Secretary of State for the Colonies left London on 24th August and spent eight days in Nyasaland and twelve days in Northern Rhodesia before proceeding to the Victoria Falls. In Nyasaland he held discussions with the Acting Governor and his Executive Council; with members of the Legislative Council, European, African and Indian; with representative European bodies, both commercial and agricultural; with certain missionaries; with representatives of the Indian and Coloured communities; with the three African Provincial Councils and the African Protectorate Council, which are the recognised bodies for the expression of African opinion; and with the Nyasaland African Congress, which corresponds to a political party. In Northern Rhodesia the Secretary of State held discussions with the Governor and his Executive Council; with the members of the Legislative Council, European and African; with representative European bodies, commercial, agricultural, municipal and trade union; with representatives of the Indian and Coloured communities; with the Barotse National Council, the African Provincial Councils in the five other provinces or representative members of them, and the African Representative Council; with the Northern Rhodesia African Congress (a body similar to the Nyasaland Congress); and with representatives of African urban councils, welfare societies and trade unions. The Secretary of State attended over eighty meetings during his tour and thus obtained a complete picture of public opinion on the proposals in Northern Rhodesia and Nyasaland.

4. The opinions which were expressed to him may be summarised as follows:

(a) European, Indian and Coloured Opinion

European opinion in Northern Rhodesia and Nyasaland is generally favourable to the proposals, subject to some minor reservations on points of detail. Europeans recognise the economic advantages of federation and the need to create a strong British bloc to resist pressure from the Union of South Africa and they believe that the proposals would safeguard their own future. The European leaders in Nyasaland, in view of African opposition to the proposals, expressed the hope that if the proposals were put into effect this might be done in such a way as to carry African opinion with them, indeed they would regard a measure of African support for the proposals as a necessary basis for their own agreement that the proposals should be carried into effect.

Indian and Coloured opinion is at present generally suspending judgment on the proposals. Indian and Coloured people recognise the economic advantages of the proposals but, before they make up their minds finally, wish to see how any detailed scheme would affect their own interests and future in Central Africa.

(b) African Opinion

African opinion in Northern Rhodesia and Nyasaland, as expressed to the Secretary of State for the Colonies during his visit, was almost unanimously opposed to the proposals. This opposition has been organised by the two African Congresses, bodies which are mainly although not entirely composed of the comparatively small educated elements in the two territories. In Northern Rhodesia the Congress has been influenced and assisted by a local European resident known to be a Communist. In Nyasaland in particular the campaign has been much influenced and indeed largely directed from outside by Dr. Hastings Banda, a Nyasaland doctor in London, who is rigidly opposed to federation and issued a pamphlet against it directed not against the report of the London Conference of officials but against the earlier proposals for federation produced in 1949 by the unofficial conference at the Victoria Falls; this pamphlet, although published after the London Conference, was written before it. The administrative staff in Northern Rhodesia and Nyasaland, although they have very fully explained the proposals to the African population over a period of weeks, have been bound, because His Majesty's Government is not yet committed to them, to refrain from any attempts at persuasion. This position has been scrupulously observed, with the result that the two Congresses have had the field open to them for three months. Although the organised campaign by the Congresses has powerfully influenced the course of events, it would be a grave mistake to regard the opposition as representing nothing more than the views of the educated minority. The chiefs and other Africans who have considered the matter also expressed themselves as opposed to the federal scheme, partly as a result of the organised campaign against it and of their dislike of change, but largely also because of their fear of Southern Rhodesia and in Northern Rhodesia of domination by the local Europeans. It must be admitted that at the time of our visit African opposition to the scheme was both general and deeply felt. This opposition ignores the advantages of federation, both economic and political, and, as some of the more intelligent Africans admitted, is based not on the proposals in the officials' report itself, but on their fear of what might follow if federation came into being. Africans are afraid that in that event their land would be taken away, that their political advancement would be endangered, that the Protectorate status of Northern Rhodesia and Nyasaland would be abolished and that federation would before long be changed into amalgamation; many of them also confuse the two terms since the same word covers both in a number of native languages. These fears are not justified by the terms of the officials' report, which contains full safeguards for African interests, specifically reserves land and political advancement, and indeed all other services closely affecting the lives of Africans, to the Northern Rhodesia and Nyasaland (and not the federal) Governments under the general supervision of His Majesty's Government as at present, and clearly lays down that the Protectorate status of the two northern territories would be preserved under the scheme, while no change in the federal scheme could be made except by His Majesty's Government with the consent of Parliament. Reassurances to this effect were given by the Secretary of State to the Protectorate Council in Nyasaland in a formal statement which was repeated at other meetings. But by the time of the visit African opinion had hardened and the African representatives at the Victoria Falls Conference were given a definite mandate to oppose federation. Indeed, it was only with great difficulty that the Africans in Nyasaland were persuaded to be represented at the Victoria Falls at all. In Northern Rhodesia there was a favourable development just before the conference; as a result of the patient arguments of Mr. John Moffatt, unofficial representative of African interests on the Executive and Legislative Councils, the African leaders authorised their representatives to inform the conference that, while the Northern Rhodesia Africans opposed federation, they would be willing to consider the question of federation again on the basis of the officials' report after the policy of partnership between Europeans and Africans in Northern Rhodesia itself had been defined and, as so defined, put into progressive operation. This very important statement means that Africans in Northern Rhodesia are likely to be willing to consider the federation proposals more favourably if as a result of discussions to be held between their representatives and Europeans during the next few months they are satisfied that their own political future in Northern Rhodesia is secured. In Nyasaland also there are now signs of a more favourable development of opinion which is referred to in paragraph 14 below.

5. The Secretary of State for Commonwealth Relations arrived in Salisbury on 10th September. During the next few days he had talks with the Cabinet, with Opposition Leaders, and with a number of representative people. The Southern Rhodesia Government had arranged for him to have meetings at Salisbury and at Bulawayo with representative Africans, urban and rural. Some of the Africans were in favour of federation, but the preponderant opinion was against it for a variety of reasons, of which some were mutually inconsistent. The Southern Rhodesia Government appeared to be prepared to come out in favour of federation, though there were certain specific points (see paragraph 16 below) on which they expressed themselves as dissatisfied. European opinion generally seemed to be in favour of closer association, with a tendency in some cases to prefer the complete amalgamation of the Territories rather than federation. As the result of the discussions with the Commonwealth Secretary, it was hoped that the Southern Rhodesian representatives at the Conference would observe care in putting forward their suggestions for varying the London proposals and would do their best to avoid a breakdown of the Conference. The Victoria Falls Conference

6. It was made clear in the statement to Parliament on 13th June that the Victoria Falls Conference was not expected to reach decisions binding on Governments, but was regarded as a further stage in our consultation with local opinion. As a result of the differing views expressed to us in the three territories, it became evident before the Conference that we could not hope to reach agreed conclusions on the substance of the officials' report. We therefore decided to aim at preventing a breakdown of the consideration of the proposals and at securing that there should be an adjourned conference next year in London where Africans had made it plain that they would always be glad to attend discussions. We also decided to aim at securing general agreement as to the economic advantages of closer association between the three territories and at persuading the Southern Rhodesia delegation to join with us in assurances which would make it easier to carry the discussions further with Africans after the conference. All these objectives were achieved.

7. The conference was not easy to handle. The Southern Rhodesia delegation consisted not only of Sir Godfrey Huggins and three of his Ministers, but also of the leaders of the Opposition parties; they were therefore a somewhat rigid body. They were anxious to secure some tangible results at the conference which they could present to their public opinion, hesitant as much of it is, about the advantages of federation. They were irritated that African opposition to the principle of federation, based on grounds which they did not regard as reasonable, prevented the discussion at the conference of the specific recommendations in the officials' report. It was only with some difficulty and with the support of the Governors of Northern Rhodesia and Nyasaland, of Mr. Welensky and Mr. Moffatt, that we were able to keep the conference on an even keel and to bring it safely into port with satisfactory conclusions. The communiqué which was eventually agreed to was based on our own draft with minor amendments by the Central African delegations.

8. The main points in the communiqué are:

(a) There was unanimous agreement that the conference should be adjourned until next year when it would meet in London; it was also agreed that in the interval there should be discussions within each territory and exchanges of views between the four Governments.

(b) Certain assurances to African opinion were unanimously accepted and it was agreed that, if any form of closer association is eventually decided upon, all these should be enshrined as an integral part of the constitution. The most important of these assurances is that the Protectorate status of Northern Rhodesia and Nyasaland should be preserved under any federal scheme and that any consideration now or in the future of amalgamation of the three territories is excluded unless a majority of the inhabitants of all three territories desired it. This represents a very substantial concession by Sir Godfrey Huggins and his colleagues and means that federation cannot lead on to amalgamation unless a majority of the Africans accept amalgamation at some stage in the future. An absolutely watertight answer to what is undoubtedly the main objection of the Africans to the scheme is thus provided. An assurance was also agreed to that the political advancement of the peoples of Northern Rhodesia and Nyasaland must remain the responsibility of the Northern Rhodesia and Nyasaland Governments (subject to the ultimate authority of His Majesty's Government) and not of any federal authority; this provides the answer to the African fear of interference by a federal authority in their own internal political advancement. Finally it was agreed that land and land settlement questions in Northern Rhodesia and Nyasaland should remain the responsibility of the Northern Rhodesia and Nyasaland Governments and not of any federal authority.

(c) There was unanimous agreement that the policy of economic and political partnership between Europeans and Africans was the only policy under which federation could be brought about; on the need for countering the dangers which would flow from any weakening of the British connection in the three territories; and on the advantages of closer association for the common handling of problems transcending territorial problems such as communications, research, defence, higher education and the planning of economic development. We joined with the conference in declaring ourselves favourable to the principle of federation; the African representatives naturally abstained from this declaration. The conference as a whole recognised that African apprehensions are one of the main obstacles to the general acceptance of federation. The Northern Rhodesia Africans, in accordance with the decision referred to in paragraph 4 above, recorded their agreement to consider the question of federation again on the basis of the report of the London Conference after the policy of partnership in Northern Rhodesia had been defined and, as so defined, put into progressive operation.

9. The concrete conclusions of the conference were themselves of considerable importance and will in our view materially contribute to the solution of the problem. The conference had an equally important intangible value as the first occasion on which Europeans of all three Central African territories have sat down with African representatives to discuss the relations between the three territories. The African members of the conference, particularly those from Nyasaland, were generally recognised to have made an important contribution to it. All the Africans expressed their deep gratitude for the arrangements made for them at the conference and the Nyasaland Africans, who had with so much difficulty been persuaded to come, volunteered at the end to other members of their delegations that it had been well worth while. The African representatives were certainly impressed by the attention paid to their views and they cannot have failed to be impressed also by the extent to which the African attitude to the scheme dominated the discussions and the differing views expressed on this subject by the various European representatives. It is significant that Sir Godfrey Huggins had already informed us before the conference, and repeated at it, that if Africans from the two northern territories were to sit on a federal Legislature Africans from Southern Rhodesia would have to sit there also. We can regard the conference as an important precedent for the inter-racial discussion of major problems in Central Africa.

Our Conclusions and Recommendations

10. So far His Majesty's Government has not declared its attitude towards the proposals in the officials' report, but if the discussion in Central Africa of those proposals is to go forward it will be necessary for an early statement of the views of His Majesty's Government to be made. We believe, for reasons given in the following paragraphs, that this statement should be favourable to federation.

11. From the economic point of view we believe that there is an unanswerable case for federation. The economies of the Central African territories are linked by a common port at Beira for all three of them, a common railway system for the two Rhodesias, the dependence on coal from Southern Rhodesia of the copper mining industry which is the life-blood of Northern Rhodesia, the prosperity which copper mining in Northern Rhodesia brings to a number of industries in Southern Rhodesia, the many commercial connections between the three territories and, last but not least, the Zambesi and Shire River basin with its great potentialities for the development of hydro-electric power and irrigation facilities if handled on a Central African basis. The population of the three territories will double itself within twenty-five years so that a vast effort in economic development will be needed if food supplies are to be adequate and living standards are to be progressively improved. For this purpose economic planning on a Central African basis is needed so that the resources of the whole region may best be devoted to economic advancement. There must be effective machinery for settling priorities in transport, supplies of coal, &c., between the competing claims of the three territories. Industrial development must proceed on a Central African basis if adequate markets are to be available as a basis for new industries and the more backward areas are to secure the advantages of this form of development. The present units of government are too small to sustain the vast expenditure needed for hydro-electric development and large-scale water control schemes and difficulties are already appearing between the two Rhodesias in connection with the plans for the harnessing of the Zambesi and its tributaries. With its enormous potentialities the Zambesi should be the centre of economic activity rather than a frontier. It may be argued that theoretically all these matters could be handled by co-operation between the three existing Governments. Experience over the past few years has shown that this not so and the only effective method of handling them is by a single federal authority answerable to a single Central African Legislature. There can be no doubt, moreover, that in external economic relations Central Africa operating as a single economic unit would be more effective than the three territories operating separately, while from the long-term point of view a Central African federal state with a more broadly based economy would be in a stronger position to face a world recession than the three territories individually.

12. Important as the economic arguments in favour of federation are, we are convinced on the basis of our recent experience in Central Africa that the political arguments are still stronger. We referred in our memorandum of 3rd May to the urgent need to counter South African pressure on Central Africa. Immigration from the Union into the two Rhodesias is almost double that from the United Kingdom. Not all of this is Afrikaner immigration, but we have definite evidence that Afrikaner immigration is being officially inspired, while, as a sign of the political interest being taken by the Nationalist Party in Central Africa, a census of all South Africans in the Rhodesias and their political sympathies is now being conducted through the Dutch Reformed Church. In Southern Rhodesia a new party has just been formed under the title of the Democratic Party; it is directed by a Mr. Cloete, who receives his salary from South Africa and described himself to The Times correspondent as an Afrikaner extremist. In Northern Rhodesia the position is still more serious in view of the comparative smallness of the European community and the dependence of the mining industry on white South African labour and owing to the difficulty of getting suitable people from this country. It is thought probable that at the next General Election in 1953 the Afrikaners will obtain five of the ten European seats on the Northern Rhodesian Legislative Council if the present electoral arrangements remain unchanged. There is a general fear among Europeans of British stock that the Afrikaners will gradually prevail, but the British element among the unofficial European community has so far shown little willingness to take active steps against this menace. The leading Southern Rhodesian Ministers are gravely apprehensive that the Afrikaners will succeed in dominating Northern Rhodesia and will then turn back on them. In Nyasaland there are so far few Afrikaners and the danger is less immediate; but if the two Rhodesias were absorbed or dominated by the Union Nyasaland could hardly stand out against such encroachment.

13. Southern Rhodesia has tightened up its immigration control law and made two years' residence and Southern Rhodesia citizenship a necessary qualification for the vote. The Northern Rhodesia Government is hoping to introduce similar legislation before the end of this year and the Colonial Secretary took the opportunity of emphasising the urgency of this to the Governor and leading unofficials. But the geographical and economic circumstances of the two Rhodesias make it impossible to keep out Afrikaners entirely and in any case immigration control and tighter conditions for the franchise, important though they are, are not sufficient by themselves to resist encroachment by the Union. We are faced in Central Africa with pressure by a country far stronger economically and industrially than any of the Central African territories, led by a militant Nationalist party with expansionist aims, anxious to strengthen its influence in the north. This pressure can be countered only by an equally firm policy of resistance to it both in the political and economic spheres—a policy which must have the support both of the European and African populations of the Central African territories, and which in our view has little chance of succeeding unless we can establish a British bloc of territories in Central Africa knit together by constitutional ties. To secure our objective we must establish conditions in Central Africa under which the British element in the European population will remain not only substantially greater in numbers than the Afrikaners but able and willing to assert their loyalty to the British connection, and at the same time conditions in which the relations between Europeans and Africans will be progressively improved and the share of the Africans in the political and economic life of the territories will be progressively increased under the policy of partnership. In our view the proposals for federation are well designed to achieve these conditions. Political development for Africans in the two northern territories is secured under the scheme to their territorial Governments and His Majesty's Government. The Victoria Falls Conference has accepted the principle of partnership as an essential condition for federation; the federal legislature would contain African representatives from all three territories, and the federal constitution would have full safeguards for African interests. The prevention of excessive Afrikaner immigration could be far more effectively secured on a Central African basis than by the three territories acting separately. The creation of a Central African federal state would greatly strengthen the confidence in themselves of the British elements in all three territories and their willingness to resist Afrikaner encroachment and by increasing the political and economic strength of Central Africa as a whole and reducing friction between its component parts would provide a much firmer foundation on which that resistance could be based. On the other hand, if owing to African opposition federation had to be abandoned, relations between Europeans and Africans in the two Rhodesias would be seriously damaged and particularly in Northern Rhodesia a political vacuum would be created which would open the way for Afrikaner infiltration on a still more powerful scale. Signs are not lacking that the South African Government, although openly its attitude is correct, is anxiously hoping that the federation proposal will come to nothing.

14. We cannot too strongly emphasise the danger to British and African interests at present assailing the Central African territories. In our view we cannot continue to adopt a negative attitude towards this danger. It is incumbent on us to take positive steps to resist it. The establishment of a federal state in Central Africa is by far the most effective step that could be taken and this, combined with the economic advantages, convinces us that positive support for federation should be given by His Majesty's Government. The Afrikaner pressure, moreover, makes early action urgent; but we should be strongly opposed to any attempt to force the federation proposals through in the face of the present solid African opposition. Fortunately the Victoria Falls Conference conclusions, with the adjournment of the conference until the middle of next year, give time for further discussions with Africans in Northern Rhodesia and Nyasaland. The African leaders in Northern Rhodesia have already indicated that they will be prepared to consider the proposals again provided that their own political future inside Northern Rhodesia is secured and discussions to this end between Europeans and Africans are shortly to begin. The African members of the Nyasaland delegation at the Conference revised their views materially after hearing the discussions although their mandate prevented them from saying so publicly and since the Conference, they have already succeeded in persuading one of the three Provincial Councils in Nyasaland to give further consideration to the scheme. The Governor of Nyasaland considers that, provided that His Majesty's Government will publicly state its general support of the federal scheme, there is a distinct chance, given a period of from six to nine months, of persuading Africans to take a less negative line. Both he and the Governor of Northern Rhodesia are convinced that if further progress is to made a favourable statement by His Majesty's Government is an essential prerequisite to it. If therefore our opinion of the advantages of federation is accepted it is clearly important that an early opportunity of announcing this should be taken by His Majesty's Government.

15. We accordingly recommend that, at as early a date as possible after the General Election, the following action should be taken:

(1) His Majesty's Government should publicly endorse the conclusions of the Victoria Falls Conference, including the proposal to hold a further representative conference in London about the middle of next year.

(2) His Majesty's Government should at the same time publicly that it would favour in principle a scheme of federation between the three territories on the general lines recommended by the London Conference of officials and considers that such a scheme would be in the best interests of the Africans as well as of the other inhabitants of the territories; that it recognises that African opinion in the two northern territories has declared itself as opposed to these proposals; but that, in the light of the assurances agreed upon at the Victoria Falls Conference and of the economic and other advantages of closer association, it trusts that Africans will be prepared to give further and favourable consideration to the proposals. His Majesty's Government should also endorse the statement in paragraph 11 (i) of the Victoria Falls Conference communique that any consideration now or in the future of amalgamation of the three territories is excluded unless the majority of the inhabitants of all three territories desire it, and should make it clear that a similar principle would apply equally to amalgamation of two of the territories or any part thereof. (3) The Governors of Northern Rhodesia and Nyasaland should be authorised to arrange further discussions on the proposals with Africans in the two territories on the basis of His Majesty's Government's statement that they favour the scheme in principle and in the light of the assurances agreed to at the Victoria Falls Conference.

(4) The discussions envisaged in paragraph 5 of the final communiqué of the Victoria Falls Conference between His Majesty's Government and the three Central African Governments, or between the three Central African Governments themselves, should be undertaken in due course with the object of elucidating points of detail in the officials' report in preparation for the London Conference.

(5) We should regard the federation of the three Central African territories as an essential measure for preventing non-British influences from the Union of South Africa from encroaching on and eventually engulfing British Central Africa. In the public statement referred to above we should endorse the agreed statement of the Victoria Falls Conference that the British connection and British traditions and principles in the Central African territories should be so strengthened as to ensure that they continue to prevail.

16. No detailed examination of the proposals in the officials' report is needed at this stage, but there are certain important points on which we wish to record our views. The final communiqué of the Victoria Falls Conference records that there are certain proposals in the officials' report relating to the federal Legislature with which the Southern Rhodesian Government do not agree; these are known to concern the number of nominated members proposed for that Legislature, the African Affairs Board and the Minister for African Interests. Our views on these points are as follows:

(a) The Southern Rhodesia difficulties about the nominated members in the Legislature can to some extent at any rate be met. The officials' report (paragraph 90 and Annex VII) proposes that the federal Legislature should consist of seventeen members from Southern Rhodesia, eleven from Northern Rhodesia and seven from Nyasaland, three of whom from each territory would represent African interests. Of the twenty-six general members the fourteen from Southern Rhodesia and the eight from Northern Rhodesia would be elected, while the four from Nyasaland would be nominated by the Governor from a panel selected by the Convention of Associations (the body officially representing Europeans in the territory). The Southern Rhodesia Government take the view that on the basis of twenty-two elected members it would be difficult to operate a party system effectively. In our view we can meet them over this by arranging for the four Nyasaland representatives to be elected, either directly or indirectly. Of the African representatives those who are actually Africans could also be elected indirectly, leaving only three European representatives of African interests to be nominated.

(b) It is possible that Southern Rhodesia will suggest a bicameral legislature with a Senate consisting partly of members representing African interests as a substitute for the African Affairs Board proposed by the officials. Our view (which was made clear to the Southern Rhodesian Cabinet by the Commonwealth Secretary) is that any such suggestion should be opposed, first because a second chamber would make the constitution cumbersome, and secondly because we do not believe that a second chamber, however composed, could be as effective as a safeguard for African interests as the African Affairs Board proposed in the report. Powers of delaying legislation would not be sufficient, while it would be hard to secure a second chamber with an absolute veto.

(c) The Southern Rhodesia Government is likely to suggest that the Minister for African Interests should be appointed in the ordinary way on the recommendation of the Prime Minister rather than by the Governor-General subject to the approval of His Majesty's Government. We think that such a proposal should be rejected, since a Minister responsible to the Prime Minister rather than to the Governor-General and His Majesty's Government could not effectively exercise the safeguarding powers proposed for the Minister for African Interests in the report, which are the lynch-pin of the proposed federal safeguards. Such a change would moreover be strongly objected to by African opinion and would make it more difficult to convince Africans in the northern territories that the scheme does not prejudice their interests. The Commonwealth Secretary sought to persuade the Southern Rhodesian Government that, with good will on both sides, the appointment of the Minister of African interests need cause no constitutional difficulties. They could be assured that His Majesty's Government would for its part work the system reasonably.

17. It will also be open to His Majesty's Government at the conference in London next year, and indeed to the African representatives at that conference, to put forward any amendment of detail to the proposals which may appear necessary from the African point of view since, owing to African opposition to the principle of federation there was no opportunity at the Victoria Falls Conference of obtaining the views of Africans on the details of the scheme. The way for this is kept open by the statement in paragraph 14 of the Victoria Falls Conference communiqué.

J. G. P. C. G. W.

FINAL COMMUNIQUÉ OF THE CONFERENCE ON THE CLOSER ASSOCIATION OF CENTRAL AFRICAN TERRITORIES: 21ST SEPTEMBER, 1951

1. The present Conference was convened by the Governments of the United Kingdom, Southern Rhodesia, Northern Rhodesia and Nyasaland for the purpose of discussing the question of closer association of the British territories in Central Africa.

2. The Conference opened at Victoria Falls on Tuesday, 18th September, and was of a representative character. In the case of Southern Rhodesia the representatives included the Prime Minister and other Ministers, and leaders of the Opposition parties in Parliament. In the case of Northern Rhodesia the delegation consisted of the Governor and official and unofficial members of the Legislative Council including Africans. Nyasaland was represented by the Governor, senior officials and leading unofficial persons, European and African. The United Kingdom delegation consisted of the Secretaries of State for the Colonies and for Commercial Relations, accompanied by some of their chief advisers.

3. The Conference had before it the Report prepared last March by a number of senior official advisers of the four Governments concerned. The authors of that Report had been requested "to examine the problem in all its aspects and consider whether it is possible in the light of this examination for them to formulate proposals for a further advance to be made in the closer association of the three Central African territories which they could recommend to the Governments of these Territories and to His Majesty's Government in the United Kingdom." Their work was purely exploratory and did not commit any of the participating Governments to the adoption of any proposals that they might formulate.

4. The Report of the London Conference of officials was unanimous on all points. Its main recommendation was that closer association between the three territories ought to be brought about and that the need for this is urgent. It recommended further that this should be done not by amalgamation of the territories, but on a federal basis; and put forward in some detail a scheme framed to take particular account of the special features of the Central African situation, including the self-governing status of Southern Rhodesia, and designed to provide substantial safeguards for the interests of Africans. Moreover, those matters most closely affecting the life of Africans would, under the proposals in the Report, come within the territorial and not within the federal sphere; and within the territorial sphere the Northern Rhodesia and Nyasaland Governments would remain responsible, as at present, to His Majesty's Government in the United Kingdom.

5. In announcing the present Conference it has from the outset been made clear that there was no intention of reaching decisions at it binding on any Government. It was realised that such a Conference might disclose points of difference with regard to the principle of federation as well as to the proposals made in Report CABINET

BILATERAL AND TRIPARTITE TALKS IN WASHINGTON AND ATLANTIC COUNCIL MEETING IN OTTAWA

10TH–20TH SEPTEMBER, 1951

MEMORANDUM BY THE SECRETARY OF STATE FOR FOREIGN AFFAIRS, THE CHANCELLOR OF THE EXCHEQUER AND THE MINISTER OF DEFENCE

Introduction

Our colleagues will recall that in a recent paper (C.P. (51) 239) the Prime Minister gave an outline of the various international problems which would be coming up for discussion during the meetings which were to be held in North America in September and of the policy of His Majesty's Government towards them. We now wish to give the Cabinet a brief report of these meetings.

2. The Foreign Secretary left the United Kingdom on 6th September to attend the Japanese Peace Conference at San Francisco. He then flew to Washington for conversations first with Mr. Acheson alone and then with Mr. Acheson and M. Schuman, in both of which he was joined by the Chancellor of the Exchequer, who was at the same time attending a parallel series of talks in connexion with the International Monetary Fund. The Secretary of State and the Chancellor of the Exchequer then flew to Ottawa on 14th September where, together with the Minister of Defence they attended the seventh session of the North Atlantic Council, which concluded on 20th September.

3. A separate report will be prepared on the San Francisco Conference. The present report will, therefore, cover only the bilateral and tripartite talks in Washington and the Atlantic Council meeting at Ottawa.

4. The four main achievements of the Washington and Ottawa Talks were in respect of Germany, Turkey and Greece and the Middle East Command, the financial aspects of defence, and Korea.

5. On Germany we reached tripartite agreement on the next stage of the negotiations with the German Federal Government for the replacement of the present occupation régime by a new contractual relationship (see Section I below).

6. On Turkey and Greece and the Middle East Command, there was agreement in the Atlantic Council to recommend to governments the admission of Greece and Turkey to the North Atlantic Treaty and also agreement between the United States and ourselves on the establishment of a Middle East Command and a joint invitation to Turkey to join it (see Section II).

7. On the financial aspects of defence we put before the Americans the balance of payments difficulties of the United Kingdom and the Sterling Area and explained that these might interfere with the fulfilment of our £4,700 million programme, and in any case made it impossible for us to contemplate accepting any further burdens. The action taken was to establish a twelve-power N.A.T.O. committee of so-called "wise men" to study, over the next two months, the whole question of financing the N.A.T.O. defence effort (see Section III).

8. On Korea the Americans gave us their views on the future conduct of the campaign and we were able to impress on them the need for caution if the Korean war was not to grow into a world war with Russia (see general discussion on the Far East, Section IV below).

9. Other principal issues discussed were: the Italian Peace Treaty and Trieste, Austria, Spain, Persia, policy towards the satellites, availability of defence forces, development of the non-defence aspects of N.A.T.O., and the frequency of and attendance at, future Council meetings (see Sections V-XII below).

I.—Germany

10. At their last meeting in Brussels in December 1950 the three Occupying Powers reached agreement on a three-fold programme:—

(a) At the invitation of the Atlantic Council they instructed the three High Commissioners to hold exploratory discussions with the Federal Government regarding German participation in the defence of Western Europe;

(b) they took note of the intention of the French Government to call a conference in Paris to discuss the “Pleven Plan” for a European Army;

(c) they instructed the three High Commissioners to begin exploratory discussions with the German Federal Government on the replacement of the existing occupation régime by a new contractual relationship.

11. As a result of the Foreign Secretary’s talks at Washington with Mr. Acheson and M. Schuman, this programme has now been carried a stage further.

German Contribution to Western Defence

12. We considered the High Commissioners’ report of their discussions with the German Federal Government, the so-called “Bonn Report,” and agreed that, pending further developments at the European Army Conference in Paris, discussions with the German Federal Government should be suspended and the “Bonn Report” put into cold storage.

European Army

13. M. Schuman explained the progress which had been made at the Paris Conference. Apart from the French Government, the German and Italian Governments had now agreed in principle to the establishment of a European Army to include a German contingent. The military details of the European Army were now being worked out by military, financial and juridical sub-committees of the Conference, and it was hoped to submit to the next meeting of the Atlantic Council in Rome in November a set of concrete practical proposals for the immediate creation of a European Army. M. Schuman was at pains to emphasise the genuinely international character of the European Army and the sacrifices which it would involve for France. Once there was a European Army, France would cease to have a national army except for the defence of her overseas territories. M. Schuman also represented strongly the French view that no steps should be taken to raise German units or to put a single German into uniform except as part of a European Army. Finally, M. Schuman declared that in all matters of military detail including the size of national units the French Government would be guided by the advice of military experts, including General Eisenhower.

14. Mr. Acheson made it quite clear that the European Army conception had the full backing of the United States Government, who had been convinced by General Eisenhower that it was a militarily practicable proposal.

15. As a result of the previous Cabinet decision on 4th September (C.C. (51) 58th meeting) the Foreign Secretary was able to assure Mr. Acheson and M. Schuman that His Majesty’s Government were disposed to favour the plan for a European Army, of which German forces would form part, that we agreed that the working out of its military arrangements must be undertaken by the Paris Conference in consultation with General Eisenhower, and that in order to assist in this work we were sending high-level military observers to Paris. At the same time he reserved our right to call for more intimate tripartite discussions if this should appear necessary and made it clear that we expected the Atlantic allies to receive preference over Germany in the supply of arms and equipment.

16. Our intervention in favour of the European Army, which was subsequently repeated in the Atlantic Council, undoubtedly gave great pleasure to the French. It was also welcomed by the Americans and there can be no doubt that it was the right course of action. By our acceptance in principle of the European Army we have re-established three power unity on the question of German defence.

Contractual Relations with Germany

17. Before Ministers got to Washington, officials of the three governments had prepared for their consideration a draft of detailed instructions to guide the three Allied High Commissioners in their negotiations with the German Federal Government for the replacement of the Occupation régime by a new contractual relationship. This draft followed the general lines foreshadowed in the Prime Minister's memorandum C.P. (51) 240 of 30th August. The Foreign Ministers were able at their meetings to resolve outstanding differences and to give final approval to these instructions. They have now been issued, and the three High Commissioners have begun their negotiations with the Germans. The basis of these instructions is that the objective should be to establish a firm political basis for our relations with the German Federal Republic, which could be maintained until a peace settlement with a unified Germany became possible; and that only such safeguards should be retained as were essential and could be maintained effectively for an extended period of years. The three powers would be ready in the framework of the contractual arrangements to abolish the Occupation Statute and to replace the High Commission by a Council of Ambassadors. They would exercise their supreme authority only in order to discharge their responsibilities regarding Germany as a whole, to deal with questions relating to Berlin, and to station forces in Germany and protect the security of these forces. They would retain the right to declare a state of emergency and take any necessary action in the event of a threat to public or constitutional order constituting a menace to the security of their forces. The Allied forces in Germany would no longer be forces in occupation of the territory of a defeated enemy but forces co-operating in the common defence to which the Federal Republic will be contributing as a partner; and their status should, so far as possible, be assimilated to that of friendly forces stationed in an Allied country. This would involve changes in the field of jurisdiction, for instance the abolition of existing Allied courts in Germany.

18. In all other fields Allied relations with Germany would be placed upon a basis of agreement and consent to be regulated by the various detailed contracts to be negotiated. In the field of restrictions on German industry, it is proposed that the German Federal Government should be asked in the contracts to maintain certain minimum prohibitions, primarily of a military nature, based upon the list drawn up by the North Atlantic Council in Brussels last December, they would also be asked to accord the Allies the necessary minimum rights of verification and inspection. A meeting of representatives of the three Governments at official level is to take place shortly in London to define and clarify these restrictions on production.

19. A tripartite meeting of officials is also to be held in London to consider further the difficult problems involved in the financial field as a result of German participation in Western defence. The Foreign Secretary will shortly be circulating a paper on this subject.

20. The idea emerged at the Foreign Ministers' meeting that at the time of any such further meeting with the German Chancellor it might be desirable to issue a joint declaration which would define the political principles upon which the arrangements as a whole were based. Such a declaration might also reaffirm the security guarantee of the Federal Republic and Berlin originally given in the New York communiqué of 15th September, 1950. In addition it might contain some assurance of the intention of the Allies to maintain troops in Germany in sufficient strength to deter Soviet aggression. No final decision was reached in these matters which will call for further consideration.

21. The Americans optimistically hope that the negotiations with the German Federal Government will be concluded within the next two months so that a treaty can be signed before the Rome meeting of the Atlantic Council at the end of November. It seems very doubtful whether we shall be able to keep to such a tight timetable: we have nevertheless now at last set in motion a process which should enable the Allied Powers to carry forward a further important stage of their policy of incorporating Western Germany as an equal member in the Western European Community.

Declaration on Germany

22. At the conclusion of the tripartite meetings in Washington, the three Foreign Ministers issued a public declaration setting out in general terms the broad objectives of their German policy. This declaration says that the aim of the three governments is “the inclusion of a democratic Germany, on a basis of equality, in a continental European community, which itself will form part of a constantly developing Atlantic community.” The declaration then goes on to pay tribute to the Schuman and Pleven Plans and today that the United Kingdom “desires to establish the closest possible association with the European continental community at all stages in its development.” It concludes with a reaffirmation of the peaceful and defensive purposes of the North Atlantic Treaty. From the public point of view, this declaration has had three important results. In the first place, it has put in its proper perspective the Allied decision to modify the Occupation regime and to rearm Germany as one step in the developing process of achieving European unity. Secondly, it is the first formal recognition by the United States and France of the special position of the United Kingdom in relation to European unity, and of our inability to integrate fully with Europe. Finally, by removing any ambiguity on this score and laying down clearly that while we cannot join the “European Community” we nevertheless wish to be closely associated with it, the declaration has succeeded in dissipating the distrust and suspicion of our policy in Europe which has for so long been embittering Anglo-French relations.

Benelux

23. Mr. Acheson, M. Schuman and the Foreign Secretary were careful to keep Benelux fully informed of our negotiations with regard to Germany, not only through officials but also through personal meetings with their Foreign Ministers in Ottawa. They gave their full approval to our decisions.

II.—Turkey and Greece and the Middle East Command

24. Our colleagues will recall that the Cabinet only agreed to the admission of Turkey and Greece to the North Atlantic Treaty on the assumption that we obtained in return Allied, and in particular American, agreement on the setting up of a Middle East Command, including Turkey, under a British Supreme Commander. Our object at the Washington and Ottawa meetings was therefore to try and get the tightest possible agreement on the Middle East Command arrangements before we gave our vote at the Atlantic Council for the admission of Turkey and Greece to N.A.T.O. In the event, this proved to be perhaps the most difficult job of the conference.

25. As far as the admission of Greece and Turkey to the North Atlantic Treaty was concerned, there was no real opposition except for pro forma protests from Norway and Denmark and, to a lesser extent, Holland. At its last meeting on 20th September the Council passed a resolution recommending each Government to “take whatever steps may be necessary to enable it to agree that the Kingdom of Greece and the Republic of Turkey be invited to accede to the North Atlantic Treaty and thereupon notify its agreement to the Government of the United States.” The effect of this resolution is to leave the final decision on the admission of Turkey and Greece to national Governments and Parliaments, and Turkey and Greece can, therefore, only become members of the Treaty when all Parliaments and Governments have formally notified their approval.

26. On the Middle East Command, on the other hand, we ran into serious difficulties with the Americans, the French, and some of the smaller Atlantic Powers led by Holland.

27. The Americans have never been quite solid on the subject of the Middle East Command, nor shared our view that Turkey belongs primarily to the Middle East and is essential to its defence. They have tended rather to emphasise Turkey’s value to Europe. Their chief anxiety is to secure Turkish military strength for the West and they do not seem to mind very much, and certainly not as much as we do, whether that strength is contributed through a Middle East Command or through General Eisenhower's European Command. Our job was, therefore, to convince them not only that a Middle East Command is essential to the solution of our joint difficulties in the Middle East (especially in Egypt), but also that, without Turkey, it is military nonsense. In this we were on the whole successful.

28. As a result of the Washington and Ottawa talks they agreed, not only to join with us in presenting the Middle East Command proposals to the Turks, but also to send General Bradley to Ankara to join with Field-Marshal Slim in pressing them on the Turkish Government. They also agreed to join with us in an invitation to Egypt to take part in the Command organisation as a founder member. In order to get this much, however, we were obliged to agree that, as far as the defence of Turkey is concerned, the Supreme Allied Commander, Middle East, should be responsible to the North Atlantic Treaty Organisation while remaining outside N.A.T.O. for purposes of the defence of the rest of the Middle East. We think that we can be satisfied that this arrangement can be made to work in practice. It must be remembered, however, that the Americans are less attached to the idea of a Middle East Command than we are, and may not be willing to keep up pressure on the Turks throughout the negotiations which still have to take place before the Command is established.

29. Rather to our surprise, the French, who had most to gain by being associated with a Middle East Command (since they have hitherto been excluded from defence planning in the Middle East) and the least to contribute to it, also made difficulties from the start. They saw the importance which we, and to a lesser extent, the Americans, attach to the establishment of this Command, and evidently thought the opportunity good to blackmail us into giving way to them on points of purely French national interest. M. Schuman said that he could only accept the proposed Command arrangements (including the British Supreme Commander) on two conditions:

(a) That a French officer was given a high appointment at the Supreme Commander's Headquarters; and (b) That in order to balance the British naval command in the Eastern Mediterranean a French Admiral was given the naval command in the Western Mediterranean.

30. The first French condition caused little difficulty. After consulting the Chiefs of Staff, the Minister of Defence and the Foreign Secretary were able to agree that a French officer of the rank of Major-General or Vice-Admiral should be appointed to the Supreme Commander's Headquarters. Mr. Acheson also agreed. The second French condition was more difficult to meet. The Americans were unwilling to accept a French naval command in the Western Mediterranean as they considered that this would interfere with the control of naval operations on General Eisenhower's Southern Flank, which had been entrusted to Admiral Carney.

31. The proposal also presented difficulties from our own point of view as to responsible for east-west communications in the Western Mediterranean if he is properly to fulfil his task of supporting the Supreme Commander, Middle East, in the Eastern Mediterranean. In spite of two special tripartite ministerial meetings, it was impossible to reconcile these views either at Washington or Ottawa. No agreement was therefore reached and we were obliged to leave Ottawa without having obtained the agreement of the French Government to our Middle East Command proposals. It was left that Field Marshal Slim and General Bradley would visit Paris on their way to Ankara and try to reach agreement on the Western Mediterranean in consultation with their French colleagues and with General Eisenhower so that a French General could join them in their mission to Turkey. The Paris talks would also have as their object the finding of an acceptable military solution of the problem of the responsibility for Turkish defence referred to in paragraph 27 above. (See footnote * below.)

- Tripartite agreement was subsequently reached in Paris on a formula, whereby, Turkey, although a member of N.A.T.O., "would be primarily associated with arrangements for the defence of the Middle East." But the latest reports from Ankara indicate that Turkey is still holding out for participation in General Eisenhower's command as the first step in her admission to N.A.T.O.

32. The objections of the smaller Atlantic Powers to the proposed Middle East Command were of a different kind. They arose from the fear that by her inclusion in a special command all of her own Turkey would enjoy a privileged position and escape the common scrutiny of her defence effort to which all other N.A.T.O. Powers are subject. It was only with great reluctance that some of the smaller countries, especially Norway, Denmark and Holland, agreed to accept Turkey into N.A.T.O. at all. Led by M. Stikker, they argued strongly that they could only do so if they were convinced that Turkey would be subject to exactly the same obligations as they are themselves. In order to appease this body of small Power opinion, it was necessary for us to agree first that all matters affecting the defence of Turkey would be subject to the control of the North Atlantic Treaty Organisation (this was the same point which the Americans had made, for different reasons); and, secondly, that the smaller Powers should be kept fully informed through the Council Deputies of the progress of three-Power discussions with the Turks.

III.—Financial Aspects of Defence

33. What we had expected to achieve at Ottawa was a realistic "confrontation" of the military and financial implications of the defence effort which would cause N.A.T.O. as a whole to review its plans and to work out a balance between the requirements of security and of economic stability in the twelve countries. Our particular objective as far as the United Kingdom was concerned was to make clear to the United States administration the seriousness of the impact of our present defence programme on our economy, and to resist any suggestion that we could do more unless there were to be radical changes of policy in the direction of a war economy both internally in each member country and in their financial relationship with each other.

34. Both these objectives were to a relative extent achieved.

(a) Exposition of the United Kingdom Situation

35. The Chancellor of the Exchequer was able both in Washington and at Ottawa to give a full account of the economic and financial position of both the United Kingdom and the Sterling Area and thus to illustrate the clash between military security and economic stability which is common in some degree to every N.A.T.O. country. He made it clear that our overall balance of payments deficit, combined with the threat of a severe dollar crisis, were making our situation increasingly difficult. While production for defence was so far up to schedule, we might be forced, if the external financial position deteriorated further, to increase our exports of goods produced by the metal-using industries, which could only be at the expense of rearmament orders. There was a danger, therefore, that we might not be able to complete our projected three-year £4,700 million defence programme on time; and it was clearly quite out of the question, in present conditions, for us to contemplate anything in the nature of an increase over our present plans. The Chancellor of the Exchequer explained to the Americans at Washington that we could not accept our forces allocation under the Medium-Term Defence Plan as a realistic target in present circumstances: the existing £4,700 million programme would not even fully equip the forces which we had undertaken to contribute to N.A.T.O. and forces in other parts of the world. Still less could be think in terms of the even higher targets on which General Eisenhower was now understood to be working.

36. Our statement was, of course, borne out by the analysis of the United Kingdom situation in the F.E.B. Report, which concludes that "the effective limit to the United Kingdom defence programme is set by the dangers to its external financial position which an even larger programme of defence production would entail." We have, it appears, convincingly carried our point both to the Americans and to N.A.T.O. as a whole that we can undertake no further efforts without either more external aid or taking the drastic step of turning over to a virtual war economy.

(b) French Position

37. M. Mayer, the French Finance Minister, made it equally clear both in Washington and Ottawa that France had reached the limit of her capacity for rearmament in present conditions. French industry was working at full pitch wherever practicable, but dependence on raw materials, and especially fuel imports, from dollar sources, particularly in the steel industry, was an important limiting factor. France had still not completed her reconstruction programme; her defence programme affected home consumption, with the resulting danger of inflation, as well as exports; and her resources in money and men were being drained by the war in Indo-China. The French dollar situation was serious, and M. Mayer said he was convinced the French Government would have to determine a maximum limit beyond which they could not carry their total defence effort without creating a disastrous inflationary deficit and endangering the currency, with fatal economic and social results, which would defeat the very objectives we sought to attain. He pleaded finally for further integration of the defence programmes of the United States and Europe by making the best possible use of our joint industrial capacity, in particular by further placing of orders in European factories and by off-shore purchases by the United States.

(c) The "Wise Men" and Prospects for the Immediate Future

38. Discussion around the F.E.B. Report on the position of individual N.A.T.O. countries, and its recommendations for national and international action to increase productivity and maintain economic stability, despite the claims of the defence effort, had the effect which we had been seeking: to bring face to face the discrepancies between economic and financial possibilities and military needs, and to make it clear to the United States that what was required was to examine and "confront" these two aspects of the problem and see what conclusions should be drawn. Time at Ottawa was too short, of course, to enable an exercise of this magnitude to be carried out in detail. The concrete outcome of the discussions in the Council was the adoption of a proposal, originally put forward in a rather different form by the French, to set up a temporary committee of the Council "to analyse the issues involved in reconciling, on the one hand, the requirements of external security . . . . and, on the other, the realistic politico-military capabilities of member countries." This committee (sometimes referred to jocularly as the "Wise Men") will consist of representatives of all twelve countries, of ministerial or near-ministerial rank, who will be responsible for all negotiations with the Governments concerned. There will also be a small Steering Group or Executive Bureau, composed of the American Chairman of the full Committee and the British and French Vice-Chairmen, to steer and expedite the work. All the military and civil agencies of N.A.T.O. are directed to co-operate with the committee in producing the military, production, financial and economic data required to build up a composite picture of the defence effort. The first step is for the Standing Group to estimate the military requirements for the defence of the North Atlantic Treaty area, and to make recommendations, again from the military point of view, for meeting those requirements. When this and information about economic capabilities are available, the Committee will be able to begin the actual task of "confrontation." A progress report will be made to the next North Atlantic Council meeting at Rome in November and a full analysis of the committee's findings is scheduled for 1st December. (The Committee began its meetings in Paris on 9th October. The United Kingdom has been represented at these meetings by the Chancellor of the Exchequer or, in his absence, by Sir E. Plowden.)

39. Hitherto, N.A.T.O. has worked in what have been water-tight departments dealing with the elementary stages of the finance, defence and production problems. This is the first time that any attempt has been made to pull together the threads of these various activities into one pattern. The proposed study will, it is hoped, at last throw up the real difficulties. We have therefore whole-heartedly supported this initiative, on the assumption that in bringing out more fully the implications of carrying out the defence programme, it will lead to firm and joint conclusions by Governments as to whether: (a) it is consistent with security to reduce the military plan; and/or (b) the economic efforts must be increased by drastic means, and, if so, how this can be done in full co-operation between the countries concerned. For the time being it is understood, of course, that countries carry on uninterruptedly with their planned defence programmes as best they can.

(d) Infrastructure

40. For several months before the Council Meeting the Deputies had been engaged in fruitless discussions on the division of the cost of an urgent programme of airfields and communications, known collectively as infrastructure, for the common use of the forces defending Western Europe. Their failure to reach a solution lay in the refusal of the United States Government, on the one hand, to depart from a "user" formula (under which they would pay no more than could be justified to Congress on the basis of direct support for the United States forces) and on the other and continental view that "capacity to pay" must be the deciding factor.

41. Shortly before the Council, the United Kingdom had put forward an arbitrary cost-sharing formula aimed at striking a compromise between these two points of view, but this had not proved acceptable to the Americans. At Ottawa, under the stimulus of a message from General Eisenhower that urgent work was being delayed by the absence of agreement on cost-sharing, a series of meetings between the United States, French and British Ministers resulted in an agreement which was not dissimilar to our proposal and which also proved acceptable to the smaller countries. Under this agreement towards a total estimated cost of £84.5 million, the United States pay £38 million, we pay £14 million the French pay £17 million plus the cost of land, &c., estimated at £4 million, and the other N.A.T.O. countries concerned share the remaining £11.5 million.

IV.—Far East: Korea, China, Indo-China

42. Talks took place between the Foreign Secretary and Mr. Acheson on the Far East on 11th September and on a tripartite basis with M. Schuman on 14th September.

Anglo-American Talks

43. Mr. Acheson gave an outline of the United States Government's proposals for action (a) if the Korea armistice talks were successful and (b) if they broke down completely.

44. The United States Government had not given detailed thought to the steps to be taken if the armistice talks were successful since they were doubtful whether political discussions arising out of an armistice could take place in the near future. If political discussions eventually took place they should be confined to the future of Korea only, between the United Nations on the one side and the North Koreans and their supporters on the other. The United Nations should not abandon the principle of a unified and democratic Korea. The United Nations had never given their blessing to the political division of Korea and should not now do so. The Secretary of State said that he was in general agreement with these views but that three points should be borne in mind:

(a) We should not lose sight of the desirability at a later stage of a wider conference to discuss Far Eastern problems as a whole.

(b) Political discussions on Korea should not be allowed to give the impression that the United Nations was a purely anti-Communist organisation. Our view was that the United Nations was a world organisation of which countries of all political creeds were members.

(c) In considering a political settlement in Korea it was essential to take steps to ensure that Korea could survive as a democratic State; it would be a pity if any settlement allowed the new Korean Government to be threatened by a Communist fifth column from within. Any settlement must also cover the question of Chinese representation in the United Nations.

45. Mr. Acheson considered that the world situation would become much more dangerous if the armistice talks broke down completely. In the latter event and on the advice of their Joint Chiefs of Staff, the United States Government proposed that:

(i) War production in the United States would be increased.

(ii) The scale of operations in Korea should be increased on the assumption that General Ridgway would receive reinforcements.

(iii) Since a stalemate would have an adverse effect on United Nations troops' morale, General Ridgway should be authorised to take the initiative in a series of battles of manoeuvre and be given discretion to penetrate as far as the "waist" of Korea. (iv) Training and rearmament of the Japanese Police Reserve should be expedited and the size of the force increased so that three or four Japanese Divisions could be formed to carry out internal security duties.

(v) The training and equipment of Korean defence forces should be intensified.

(vi) All restrictions on the bombing of targets within Korea should be removed and General Ridgway authorised to bomb the dams across the Yalu River and power stations on the south bank of the river provided that the Manchurian frontier was not crossed.

(vii) If major air attacks were made on United Nations forces from bases outside Korea, General Ridgway should be authorised to carry out standing instructions to eliminate the air bases from which the attacks were mounted.

(viii) The Unified Command should report to the United Nations on the armistice talks, making it clear that the breakdown was the sole responsibility of the North Koreans and their associates.

(ix) The United Nations should be asked to reaffirm its determination to oppose aggression in Korea and to provide additional help.

(x) Members of the United Nations should be asked to support an embargo on all shipments to China and to agree voluntarily to prevent their ships entering Chinese ports. The United States Government recognised that a naval blockade of China was impracticable.

46. The Foreign Secretary then made the following comments:

(a) His Majesty's Government were anxious not to become involved in a full-scale war in China.

(b) Korea was one example of Russian trouble-making and there was no telling where and when she might make trouble next in Asia or elsewhere. Economic and social conditions in the Middle East provided a good opportunity for Russia to make trouble. The Korean war should not be considered in isolation but as part of a global struggle between the West and Russia.

(c) China was not yet, in our view, proved to be a slavish satellite of the Soviet Union. We should avoid driving Russia and China closer together and maintain such contacts as we had with the Chinese Government.

(d) We would prefer to defend the Kansas Line in Korea rather than a line which might not be tactically as favourable.

(e) The Foreign Secretary promised to think over the proposal regarding discretion to General Ridgway to manoeuvre north of the Kansas Line up to the "waist." (Subsequently after consideration in London the State Department was informed that we would prefer that there should be no major advance to the "waist" without specific Governmental approval, but that should the enemy become disorganised and demoralised, General Ridgway's hands should not be tied and that in such circumstances an advance by manoeuvre as far as the "waist" but not beyond, might well be undertaken.)

(f) He agreed that a stalemate in Korea would be bad for the morale of the United Nations troops.

(g) He assumed that the Japanese Police Reserve Divisions would not be used in Korea but only for internal security duties in Japan. Mr. Acheson confirmed that this was the intention. (The State Department was subsequently informed that we agreed that the minimum rearming of Japanese internal security forces could be undertaken provided equipment was not at the expense of other N.A.T.O. countries and if it was militarily necessary to withdraw part of the United States garrison in Japan to Korea. We also wished the raising of any such forces to be carried out in such a manner as to prevent any provocation to Russia while the Peace Treaty is not in effect.)

(h) He agreed that efforts should be made to build up dependable South Korean forces.

(i) On the bombing of the Yalu dams and power stations we reserved our position. (Subsequently, after consultation with London, we informed the United States Government of His Majesty's Government's concurrence. As regards retaliatory bombing of targets in China—see paragraph 4 (vii) above—the United States Government have again been informed that we consider prior consultation essential. They have not accepted this viewpoint as they consider that a situation might arise in which, for the safety of the United Nations forces, retaliatory bombing would be necessary but in which time might not permit prior consultation. Discussion with them continues.)

(i) We were glad that the United States Government did not consider a naval blockade practicable. As regards members of the United Nations being asked to stop their ships from calling at Chinese ports, the Secretary of State said that this would cause us difficulty and that he would wish to consider the question further. (As the result of further consideration in London the State Department has been informed that we would be against an embargo on all shipments to China and on ships entering Chinese ports since this would be tantamount to an economic blockade, a policy to which we are opposed. We are, however, willing to discuss means of strengthening the existing embargo under the United Nations Resolution of 18th May, 1951, and of making it more effective.)

(k) The Foreign Secretary agreed with the proposals made by Mr. Acheson in paragraph 4 (viii) and (ix) above, but pointed out that His Majesty's Government would find it difficult to spare more troops. (The State Department were subsequently informed that agreement was conditional on any reinforcements not being at the expense of national contributions to N.A.T.O.)

Tripartite Talks

47. On 14th September M. Schuman joined us in our discussions on the Far East. Mr. Acheson and the Secretary of State both put forward, in somewhat more general terms, the points we had already made in the bipartite talks as recorded above. M. Schuman took note of our statements which he said would require study in Paris. He then referred to Indo-China, where France had two main objects. The first was to obtain the maximum internal support for the agreements between France and the Associate States, and the second was to build up the Viet Nam Army. Great progress had been made with the latter, and the Associate States had decided on general mobilisation in October. The chief danger was Chinese intervention in force, especially if there was to be an armistice in Korea which would release Chinese troops for service elsewhere. It was of paramount importance for the United States, Britain and France to maintain contact on the situation in South-East Asia.

48. The Secretary of State assured M. Schuman that the United Kingdom was behind France in her struggle in Indo-China and would give her all reasonable and practicable support. Mr. Acheson commented that the United States Government regarded the maintenance of a strong position in Indo-China as of vital importance.

General

49. Though realistic, Mr. Acheson's programme for the Far East is fundamentally cautious, and with some important reservations, particularly on the economic side, we have been able substantially, to accept it.

V.—Italian Peace Treaty and Trieste

50. At the tripartite meetings in Washington we reached agreement on the text of the Tripartite Declaration on the revision of the Italian Peace Treaty, and decided that it should be published as soon as we had agreed with the Italians on the text of the proposed Italian Note to the signatories of the Treaty. The substance of the Note was agreed at Ottawa and (as our colleagues are aware) the Declaration was accordingly issued at Washington on 26th September, during Signor de Gasperi's visit to the United States.

51. As regards the time-table for de facto revision, the Americans insisted that the final stage, i.e., the favourable reply to the Italian Note, should not be delayed by more than six to eight weeks from the moment the Note was presented. They did not feel that our agreement to the revision of the Treaty should be dependent on a settlement of the Trieste issue. The Foreign Secretary made it clear that we attached great importance to bringing Yugoslavia and Italy together and that, though he would agree reluctantly not to make this settlement a condition of revision, we must continue to put strong pressure upon them from now on to achieve it. It was important that Italy herself should not know a time limit had been set for our reply lest she should try to spin out the Trieste negotiations. If she remained under the apprehension that they were an essential preliminary to revision of the Treaty she would be much more likely to try to reach a quick settlement.

52. The three Foreign Ministers agreed accordingly that when the Italian Note was received it would merely receive a sympathetic acknowledgement and that six to eight weeks might then elapse, during which we should do our utmost (a) to persuade the Italians and the Yugoslavs to settle the Trieste issue, and (b) to ensure through diplomatic channels, the co-operation of other signatories, especially India, Yugoslavia, Ethiopia and Greece. We would hope that by then the Trieste issue would have been settled: but whether it had or not we would expect to send notes of reply at the end of this period. The notes would say:

(a) that so far as our bilateral relations were concerned, and without prejudice to the rights of third parties, we agreed not to enforce certain specified articles of the Treaty; (b) that the moral stigma inherent in the Preamble of the Treaty no longer affected our bilateral relations.

We would hope that other signatories would then do likewise.

53. Rather to our surprise the Americans did not seem to be greatly impressed by the argument that the Italian question must be handled in a way so as to cause the least possible offence to Tito. Whether because of internal political considerations connected with the Italian vote or for some other reason, the Americans clearly thought that Italy was the better horse to back if it came to a choice. Their calculation is presumably that Tito has now burnt his boats and is firmly landed on the Western side. However, we have probably started them thinking.

54. During the Ottawa meetings the Italians also secured the tacit support of N.A.T.O. for the elimination of any discrimination against them under the Peace Treaty. The Council approved a statement on the North Atlantic Community stating inter alia that all obstacles which hindered co-operation between the N.A.T. countries on an equal footing should be removed. Signor De Gasperi asked the Council—having previously obtained our support and that of the French and Americans for this move—to agree that these words should be regarded as applying particularly to Italy. This interpretation was strongly backed by M. Schuman and was not challenged by any member of the Council. It is thus now common ground in N.A.T.O. that our intention is to re-establish Italy's position on an equal footing with other members as soon as this becomes practicable. We did not, of course, accept the view that N.A.T.O. had a locus standi on revision.

VI.—Austria

55. The Americans at the outset wished the Austrian Deputies to be convened in October, but Mr. Acheson readily accepted our contention that it would be better, if possible, to get the Trieste and Italian issues out of the way if possible before going into a meeting on Austria. It was finally agreed that we should look at the international situation, particularly the situation in Trieste, some time in October, and consider the possibility of convening the Deputies in November.

VII.—Spain

56. Both M. Schuman and the Foreign Secretary made it very clear to Mr. Acheson that they regretted the recent American approaches to Spain and hoped that the Americans would not go further in their negotiations than was strictly necessary. Mr. Acheson told us that he was fully conscious of the strength of public opinion in the United Kingdom and in France on this subject. He assured us that he was trying to keep the negotiations on a minimum basis for that reason, and that there was no question of trying to bring Spain into N.A.T.O. or Western defence plans. But he pointed out that he too had to reckon with public opinion. It would have been difficult for him to justify to the United States public a refusal to negotiate for bases on grounds of principle, and it would have been unwise to yield to United Kingdom and French pressure in this matter since bitter resentment would have been caused against our two countries. He assured us that the State Department would keep us fully informed of the progress of the negotiations.

VIII.—Persia

57. On Persia, the Foreign Secretary's object was not to reach decisions; that would not have been possible in a fluid and changing situation; but rather to have a general talk with Mr. Acheson and Mr. Harriman and to explain to them personally the broad lines of our Persian policy. Mr. Morrison emphasised our conviction that it was near enough impossible to deal with Mussadeq and that the best hope lay in an early change of Government. He also made it plain that if active steps were taken to expel British subjects from Abadan it would create a very grave situation. Mr. Acheson and Mr. Harriman were both helpful, but there was inevitably a difference of emphasis between our two points of view. They were quite frank in urging us to be patient and conciliatory, and they expressed strongly the hope that we would not take any precipitate action by pressing the Shah too hard for the removal of Mussadeq or by armed intervention.

IX.—Policy towards the Satellites

58. The Americans had inserted in the agenda an item which seemed to point towards a desire on their part that we should join them in a more offensive policy towards the Satellite Governments. In the event, Mr. Acheson withdrew this item. Here, it seems, we have another proof of the moderate breeze blowing in Washington at the moment.

X.—Availability of Defence Forces

59. At Mr. Shinwell's suggestion the Defence Ministers met together at one stage during the Ottawa Conference and carried out a useful review of such matters as the speed at which reserve forces could be put into the field after D-Day, the provision of equipment and increases in the period of national service.

60. At the conclusion of their review, the Defence Ministers accepted a United Kingdom recommendation that an appreciation should be prepared for the Military Committee for subsequent submission to the next meeting of the Council in Rome of the readiness and effectiveness of the forces allocated to N.A.T.O. which would be immediately available in the event of war.

61. In addition to this appreciation, the Council called for the submission to its next meeting in Rome of an estimate of the relative strength and capabilities of the forces of N.A.T.O. and of the Soviet bloc at present and in the immediate future. This estimate may well serve as a useful background for our discussions at Rome.

XI.—Development of non-Defence Aspects of N.A.T.O.

62. At Ottawa the Americans put forward important proposals, of which they had previously given us warning, for developing the "non-defence" aspects of N.A.T.O. The suggestion tabled by Mr. Acheson was that those countries which had shown special interest in the social, economic and cultural aspects of N.A.T.O. should form a committee to make proposals for developing this side of the alliance—i.e., the implementation of Article 2 of the Treaty—which in our present preoccupation with defence plans was in danger of being side-tracked indefinitely. The origin of this plan was the realisation that many of the smaller Powers, particularly the Dutch and Scandinavians, were growing increasingly restive at their lack of influence over the major decisions of the Council and at what they felt to be unjustified "press-ganging" by the big three (this has been particularly apparent in the discussions over Turkey and Greece). The Americans were anxious therefore to mollify these countries to some extent by giving them a more prominent part to play in the affairs of N.A.T.O. The proposal received prompt support and developed into a full discussion of the wider aspects of the N.A.T. association, and an expression of our common desire to work for the long-term aim of the prosperity of the Atlantic Community as well as the short-term goal of military security.

63. In the course of this discussion, the Council drew up an important statement of faith stressing the peaceful objectives of N.A.T.O., which was released for publication. This statement announced the formation of a ministerial committee, composed of representatives of Belgium, Canada, Italy, the Netherlands and Norway, to "consider the further strengthening of the North Atlantic Community and especially the implementation of Article 2 of the North Atlantic Treaty." This committee will make recommendations to the Council for co-ordination and frequent consultation on foreign policy, particularly in regard to the promotion of peace; on cultural, economic and social co-operation within N.A.T.O. or through other agencies; and on collaboration in the fields of culture and of public information. It is understood, of course, that this body will not duplicate the work of any existing international organisations, and the Foreign Secretary uttered a warning against elaborate staffs and unnecessary expenditure.

XII.—Future Council Meetings

64. In view of the elections in this country, it was agreed to defer the next N.A.T.O. Council Meeting (in Rome) to the end of November.

65. The North Atlantic Council also unanimously decided that more ministerial meetings were essential if work was to be carried on effectively and agreed that in future there should be meetings of the Council—though not necessarily in the full conclave of 36 ministers—about three of four times a year.

Conclusions

66. Apart from the solid achievements recorded above, there are also more general conclusions to be drawn from the meetings which it may be useful to set down as pointers to the future.

67. First of all, from the point of view of Anglo-American relations, the meetings were successful in bringing our policies much closer together. This applies particularly to the Middle East. It is clear that the Americans have now reached the conclusion that our two countries can no longer afford to pursue independent policies in the Middle East and that if the whole area is to be saved for the West, they must give us their full support in Egypt and elsewhere. There are still of course a number of other questions on which our policies have still to be brought into line, chief among them the looming problem of the finance of defence, which has not really been tackled yet as something which has to be solved jointly. While some Americans pay lip-service to "burden sharing," they are really still thinking in terms of "Aid"—and even on that Congress has been extremely difficult.

68. During all our discussions Mr. Acheson impressed us as the outstanding American who is sensitive to the complex reactions of the European countries and above all understands and sympathises with our own particular approach to world problems. There was a heightened statesmanship and increased mellowness in Mr. Acheson's handling of all these matters. The popular success of the Japanese peace treaty and the enviable personal success which he had at San Francisco were no doubt partly responsible for this. After San Francisco and the President's public eulogy he clearly felt himself in a strong position. Time and again he helped us out, particularly in the very tricky negotiations with the French over the Middle East Command. Attacks on Mr. Acheson, which have become a feature of American internal politics, will doubtless revive. But so long as Mr. Acheson is at the State Department, and whatever trimming of his policies he may be forced to resort to in the face of public criticism, we can feel confident that American foreign policy will be conducted by a man who understands the British position and sympathises with the British approach to international affairs.

69. Secondly, the meetings have also resulted in a great improvement in Anglo-French relations. Our support in principle of the French plan for a European Army and our signature of the joint tripartite declaration on Germany, together with the fact that we found ourselves taking much the same line on the economic problems of defence, seem to have had quite a disproportionate effect on French opinion and to have dissipated at last the cloud which our ambiguous attitude towards European integration has recently cast over Anglo-French relations.

70. Thirdly, the Ottawa meeting showed how sensitive the smaller Atlantic Powers, particularly Holland and Denmark and Norway, have become to leadership by the three Great Powers unless exerted with more tact than the Americans habitually display. If we are effectively to maintain the Atlantic Alliance we cannot afford to ignore this small Power complex and it is therefore important that we should in future make full use of the Council Deputies as a shock absorber for their grousing and resentment at three-Power leadership.

71. Fourthly, the value of having a meeting of the Finance and Economic Ministers of the N.A.T.O. Powers was immediately apparent; it was largely due to their presence that the Council gave practical recognition for the first time to the need to take account of financial and economic possibilities and limitations. From this point of view it may be said that the attendance of Finance and Economic Ministers was overdue; however, that may be, such meetings should clearly continue to be held regularly in the future.

72. Finally, we felt that separate meetings of Defence Ministers during the course of these Conferences are of great value in reviewing the progress that has been made in the defence field, and that they should be a regular feature of Council meetings in the future.

H. M. H. G. E. S.

22nd October, 1951 CABINET

CUSTODY OF CABINET DOCUMENTS

NOTE BY THE PRIME MINISTER

It is a well-established and useful rule that members of the Government in office may not have access to the Cabinet papers of earlier Governments save by agreement between the two Prime Ministers concerned. To assist in securing compliance with this rule in the immediate future, I ask that all Ministers should forthwith return to the Cabinet Office all copies now held by them of (i) papers and minutes of the Cabinet itself, and (ii) papers and minutes of all Ministerial Cabinet Committees and other Ministerial Meetings except the following:

- Civil Defence Committee
- Commonwealth Affairs Committee
- Overseas Reconstruction Committee
- China and South-East Asia Committee
- Lord Presidents (Accommodation) Committee

The papers of the Committees listed above may be excepted from the general rule and left in the possession of Departments, since they contain little material which is likely to be the subject of political controversy.

2. I ask that Ministers should not take away with them, on relinquishing office, any Cabinet papers—whether papers of the Cabinet itself, or of Cabinet Committees or Meetings of Ministers. This request applies to the papers which a Minister submitted himself as well as to papers submitted by other Ministers.

I am satisfied that under modern conditions general compliance with this request is necessary for the purpose of ensuring the safe custody of Cabinet documents. Any former Minister may at any time have access in the Cabinet Office to copies of Cabinet or Cabinet Committee papers issued to him while he was in office; and the services of the Secretary of the Cabinet and his staff will continue to be available to former Ministers for this purpose.

C. R. A.

10, Downing Street, S.W. 1, 26th October, 1951.